**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Amendment
      No. 1 to**


**FORM
      10-KSB**





x ANNUAL
      REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      fiscal year ended December 31, 2007





o TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the
      transition period from ____________ to ____________




Commission
      File Number 000-51364





**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**


(Name
      of
      small business issuer in its charter)





**Utah**
            **32-0028823**(State
                or other jurisdictionof
                incorporation or organization)
            (IRS
                Employer Identification No.)





No.18
      Zhong Guan Cun Dong St.


Haidian
      District


Beijing,
      P. R. China 100083


(Address
      of Principal Executive Offices) (Zip Code)





Issuer's
      Telephone Number: 86-10-82600527





Securities
      registered under Section 12 (b) of the Act: NONE





Securities
      to be registered under Section 12 (g) of the Act:





COMMON
      STOCK, PAR VALUE $.001 PER SHARE


(Title
      of
      Class)





Check
      whether the issuer is not required to file reports pursuant to Sections 13
      or
      15(d) of the Exchange Act. o




Check
      whether the issuer (1) filed all reports required to be filed by Sections 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. o











Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No x





State
      Issuer’s revenue for its most recent fiscal year: $20,267,756




As
      of
      March 28, 2008 the aggregate market value of the common stock held by
      non-affiliates was approximately $3,198,872, based upon the last reported
      closing price on March 28, 2008 of $2.35. As of March 28, 2008, there were
      24,877,271 shares of common stock outstanding.





Documents
      incorporated by reference: Please refer to notes at the end of exhibits
      table.





Transitional
      Small Business Disclosure Format: Yes o No x





**EXPLANATORY
      NOTE**





This
      Amendment No. 1 to our annual report on Form 10KSB for the fiscal year ended
      December 31, 2007 initially filed with the Securities and Exchange
      Commission on March 31, 2008 is being filed to restate our accrued liabilities
      and to correct financial data contained in some footnotes.










TABLE
      OF
      CONTENTS





PAGEPART
                IItem
                1.
            Description
                of Business
            2Item
                2.
            Description
                of Property
            25Item
                3.
            Legal
                Proceedings
            26Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            26PART
                IIItem
                5.
            Market
                for Common Equity and Related Stockholder Matters
            26Item
                6.
            Managements
                Discussion and Analysis or Plan of Operation
            27Item
                7.
            Financial
                Statements
            39Item
                8.
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            39Item
                8A.
            Controls
                and Procedures
            39Item
                8B.
            Other
                Information
            40PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters and Control persons; Compliance with
                Section
                16(a) of the Exchange Act.
            40Item
                10.
            Executive
                Compensation
            43Item
                11.
            Security
                ownership of Certain Beneficial Owners and Management
            44Item
                12.
            Certain
                Relationships and Related Transactions
            46PART
                IVItem
                13.
            Exhibits
            47Item
                14.
            Principal
                Accountant Fees and Services
            50Signatures
            51








**PART
      I**





**Item
      1.**  **Description
      of Business**





**Information
      regarding forward-looking statements and other information in this annual
      report**





This
      annual report and the documents to which we refer you and incorporate into
      this
      report by reference contain forward-looking statements. In addition, from time
      to time, we or our representatives may make forward-looking statements orally
      or
      in writing. We base these forward-looking statements on our expectations and
      projections about future events, which we derive from the information currently
      available to us. Such forward-looking statements relate to future events or
      our
      future performance. You can identify forward-looking statements by those that
      are not historical in nature, particularly those that use terminology such
      as
“may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,”
“believes,” “plans,” “projected,” “predicts,” “potential” or “continue” or the
      negative of these or similar terms. In evaluating these forward-looking
      statements, you should consider various factors, including those described
      in
      elsewhere in this report. These and other factors may cause our actual results
      to differ materially from any forward-looking statement. Forward-looking
      statements are only predictions. The forward-looking events discussed in this
      report, the documents to which we refer you and other statements made from
      time
      to time by us or our representatives, may not occur, and actual events and
      results may differ materially and are subject to risks, uncertainties and
      assumptions about us.





Unless
      otherwise noted, all currency figures in this filing are in U.S. dollars.
      References to the “PRC” or “China” are to the People’s Republic of China.
      References to "yuan" or "RMB" are to the Chinese yuan (also known as the
      renminbi). According to the currency exchange website www.xe.com, on March
      31,
      2008, $1.00 = 7.0312 yuan.





“Sino
      Gas,” “we” and “the Company” refer to Sino Gas International Holdings, Inc. and
      our subsidiaries or, as context requires, Sino Gas International Holdings,
      Inc.
      alone. “Exchange Act” refers to the Securities Exchange Act of 1934, as
      amended.





Unless
      otherwise indicated, “2007”, “2006” and “2005” refer to the fiscal years ended
      December 31, 2007, December 31, 2006 and December 31, 2005,
      respectively.





**Overview**





We
      are
      engaged in the development of natural gas distribution systems and the
      distribution of natural gas to residential and industrial customers in small-
      and medium-sized cities in the People’s Republic of China (“PRC”), through our
      indirectly owned subsidiaries in the PRC, Beijing Zhong Ran Wei Ye Gas Co.,
      Ltd.
      (“Beijing Gas”) and its subsidiaries.





We
      currently own and operate 24 natural gas distribution systems serving
      approximately 69,860 residential and 4 industrial customers. Our facilities
      include approximately 700 kilometers (“km”) of pipeline and delivery networks
      with a daily distribution of approximately 70,000 cubic meters of natural gas.
      We have two types of customers: (i) residential and (ii) industrial. The
      following table presents, for the periods indicated, selected operating
      data:




At and for the year ended
              December 312007
            
            2006
            
            2005Total
                gas distributed and supplied (US$ millions)
            
            
            7.3
            
            
            3.91
            
            
            3.92Distribution
                network (km)
            
            
            700
            
            
            390
            
            
            187.8Number
                of industrial customers
            
            
            5
            
            
            5
            
            
            4Number
                of residential customers
            
            
            93,708
            
            
            48,199
            
            
            23,700


2





We
      own
      and operate natural gas distribution systems in small and medium sized cities
      in
      Hebei, Jiangsu, Jilin and Anhui Provinces in addition to three natural gas
      distribution systems in the suburbs of Beijing. Beijing is not a province but
      a
      municipality directly under the jurisdiction of China’s State Council and has
      many urban districts in the suburbs.









We
      generate revenues in two ways: (i) connection fees for the interconnections
      to
      our natural gas distribution system and (ii) the sale of natural gas. The
      following table presents, for the periods indicated, the revenues generated
      from
      each of our major categories of operations:


3





At and for the year ended
              December 312007
            
            2006
            
            2005(in US$
              millions)
            
            (in US$
              millions)
            
            (in US$
              millions)Connection
                fees (as % of total Sales)
            
            
            13.0
            (64)%
            
            6.96
            (64)%
            
            6.98
            (64)%Gas
                sales
            
            
            7.3
            (36)%
            
            3.91
            (36)%
            
            3.93
            (36)%Other
                sales
            
            
            —
            
            
            —
            
            
            —





Our
      cost
      of sales consists of cost of gas sales and cost of connection. Cost of gas
      sales
      consists of cost of natural gas purchased from the suppliers, transportation
      cost, depreciation of plant and equipment, and amortization of the capitalized
      construction costs as our expenditures in constructing our pipeline
      infrastructure are generally capitalized as fixed assets and amortized over
      a
      period of time. Cost of connection includes certain construction costs that
      are
      expensed. The following table presents Beijing Gas’s costs of sales for the
      periods indicated:




For
                the year ended Dec 31(US$
                millions)
            
            2007
            
            2006
            
            2005Gas
                costs
            
            
            6.37
            
            
            2.95
            
            
            2.77Connection
                costs
            
            
            3.13
            
            
            1.44
            
            
            1.36





We
      buy
      natural gas for distribution in two forms: (i) compressed natural gas (“CNG”);
      and (ii) liquefied natural gas (“LNG”). Both CNG and LNG are natural gas that
      has been compressed into canisters so as to enable transportation, usually
      by
      truck, to the point of distribution or consumption. Typically CNG is compressed
      under 20.2 MPa pressure and transported at normal temperature, while LNG is
      compressed at 60.6MPa pressure and transported at sub zero degree temperature.
      CNG is generally transported within a distance of 300 km. There is no distance
      restriction in transporting LNG. As LNG is compressed at much higher pressure
      and transported at much lower temperature than CNG, the cost of compression
      and
      processing of LNG is higher than that of CNG. Generally, if a city is located
      within 300 km of our natural gas supplier, we transport CNG to the customers.
      We
      transport LNG to a city if it is located more than 300 km away from a supplier.
      Approximately 99% of the natural gas we purchase is CNG and approximately 1%
      is
      LNG.





Our
      business is generally affected by two seasonal factors: First, between December
      and March, the weather is too cold in northern China for construction. For
      a
      given gas distribution project, to avoid running into this time period, we
      generally start the process of pipeline installation, which has a duration
      of
      six to eight months, in April so as to complete the process before December.
      As
      a result, most of our revenues from connection fees are recorded in the fourth
      quarter. Second, winter is our peak season for gas sales, as our customers
      tend
      to consume more natural gas for heating purposes.





**Organization
      and Structure of the Company**





We
      operate through our indirectly-owned subsidiaries in the PRC, Beijing Gas and
      its subsidiaries.


4




As
      of
      March 31, 2008, our corporate structure is set forth
      below:











(1)
      The
      subsidiaries of Beijing Gas are set forth below:





Name
                of Subsidiary
            
            Beijing Gas Equity Interest %Peixian
                Weiye Gas Co., Ltd
            
            90Sihong
                Weiye Gas Co., Ltd
            
            95Wuhe
                Weiye Gas Co., Ltd
            
            100Changli
                Weiye Gas Co., Ltd
            
            100Yutian
                Zhongran Weiye Gas Co., Ltd
            
            90Weixian
                Jinli Gas Co., Ltd
            
            100Zhangjiakou
                City Xiahuayuan Jinli Gas Co., Ltd.
            
            100Wuqiao
                Gas Co., Ltd
            
            95Jinzhou
                Weiye Gas Co., Ltd
            
            95Shenzhou
                Weiye Gas Co., Ltd
            
            95Ningjin
                Weiye Gas Co., Ltd
            
            95Linzhang
                Weiye Gas Co., Ltd
            
            85


5





Hengshui
                Weiye Gas Co., Ltd
            
            100Longyao
                Zhongran Weiye Gas Co., Ltd
            
            95Xingtang
                Weiye Gas Co., Ltd
            
            95Gucheng
                Weiye Gas Co., Ltd
            
            100Langfang
                Development Region Weiye Dangerous Goods Transportation Co.,
                Ltd
            
            95Beijing
                Chenguang Gas Ltd.
            
            100Xinji
                Zhongchen Gas Co., Ltd
            
            100Tianjin
                Chenguang Gas Co., Ltd
            
            100Luquan
                Chenguang Gas Co., Ltd
            
            100Cheng’an
                Chenguang Gas Co., Ltd
            
            100Nangong
                Weiye Gas Co., Ltd
            
            100Sishui
                Weiye Gas Co., Ltd
            
            95Guannan
                Weiye Gas Co., Ltd
            
            100Sixian
                Weiye Gas Co., Ltd
            
            100Baishan
                Wiye Gas Co., Ltd
            
            100





**Organizational
      History**





Sino
      Gas
      International Holdings, Inc. was incorporated under the laws of the State of
      Utah on August 19, 1983 as Evica Resources, Inc. On April 5, 1984, we changed
      our name to American Arms, Inc. American Arms, Inc. commenced the manufacture
      and sale of weapons and laser sights. On April 12, 1988, we changed our name
      to
      American Industries, Inc. as we were no longer engaged in the manufacturing
      and
      sale of weapons and laser sights. American Industries, Inc. was in the business
      of providing room safes for hotels.





On
      February 19, 2002, we formed a subsidiary corporation named Pegasus Tel, Inc.
      under the laws of the State of Delaware, in order to enter into the
      telecommunications business. On March 28, 2002, Pegasus Tel, Inc. merged with
      Pegasus Communications, Inc., a New York corporation, with Pegasus Tel, Inc.
      as
      the surviving entity. On January 14, 2002 we purchased payphone assets
      consisting of 29 payphones and associated equipment from the Margaretville
      Telephone Company for $11,600.00.





On
      May
      21, 2002, we changed our name to Dolce Ventures, Inc.  We were an inactive
      shell between May 2002 and September 7, 2006.


6




On
      September 7, 2006, the shareholders holding 72,569,764 shares of our common
      stock, which constituted 72.01% of the then outstanding shares of our capital
      stock, sold all of their shares to GAS Investment China Co., Ltd. (“Gas (BVI)”),
      the parent company of Beijing Gas, for a cash consideration of $675,000. On
      the
      same date, we consummated a share exchange transaction with the shareholders
      of
      Gas (BVI), whereby we exchanged 14,361,646 shares of our Series A Convertible
      Preferred Stock, par value $0.001 per share (“Series A Preferred”), which
      constituted all of the then outstanding shares of our Series A Preferred, for
      all of the issued and outstanding stock of Gas (BVI) held by the shareholders
      of
      Gas (BVI). As a result of the share exchange transaction, Gas (BVI) became
      our
      wholly-owned subsidiary, and Beijing Gas became our indirectly wholly-owned
      subsidiary. In addition, as a result of the share exchange transaction, we
      ceased being a shell company as such term is defined in Rule 12b-2 under the
      Exchange Act and are now engaged in the development of natural gas distribution
      systems and the distribution and supply of natural gas in the PRC.




On
      November 17, 2006, we changed our name to Sino Gas International Holdings,
      Inc.
      and effected a 304.44-for-1 reverse stock split which reduced the number of
      the
      outstanding shares of our common stock from 100,770,140 to 331,002. Upon the
      effectiveness of the reverse stock split, each of the 14,361,646 shares of
      the
      then outstanding Series A Preferred was automatically converted into one share
      of our common stock, resulting in all of the shareholders of Gas (BVI)
      immediately prior to the share exchange owning approximately 97.7% of the
      outstanding shares of our common stock immediately after the reverse stock
      split, with Mr. Yuchuan Liu, the CEO of our company, owning 36.7%, Gas (BVI)
      owning 1.6% and the original shareholders of Dolce Ventures, Inc. immediately
      prior to the share exchange owning 0.6%.





**Organizational
      History of Gas (BVI) and Beijing Gas**





Gas
      (BVI)
      was incorporated on June 19, 2003 in the Territory of the British Virgin Islands
      with Mr. Liu Yu Chuan as its sole shareholder. Gas (BVI) is the holding company
      for Beijing Gas. Prior to the acquisition of all of the equity interests of
      Beijing Gas by Gas (BVI) as described below, Gas (BVI) had no business
      operations, assets or liabilities, apart from organizational expenses and
      fees.




Beijing
      Gas was originally formed as a limited liability company under the laws of
      the
      PRC in 2001 under the name Beijing Yuan Wang Yu Cheng Construction Ltd., and
      changed its name to its current name, Beijing Zhong Ran Wei Ye Gas Co. Ltd.,
      in
      June 2003.  On February 17, 2004, Gas (BVI) acquired all the outstanding
      capital stock of Beijing Gas from its then shareholders. On July 14, 2004,
      Gas
      (BVI) transferred 1% of the capital stock of Beijing Gas to Shen Zhen Shen
      Qi
      Cheng Tong Investment Ltd., a limited liability company organized under the
      laws
      of the PRC (“Shen Zhen Shen Qi”), and, simultaneously, Shen Zhen Shen Qi
      invested RMB 20 million in Beijing Gas in exchange for 50% of its capital stock.
      As a result, Gas (BVI) and Shen Zhen Shen Qi held 49% and 51% of the capital
      stock of Beijing Gas, respectively. On April 30, 2006, Gas (BVI) acquired all
      of
      the capital stock of Beijing Gas held by Shen Zhen Shen Qi in exchange for
      RMB
      20.4 million. As a result of this transaction, Beijing Gas is now a “wholly
      foreign owned entity” under PRC law by virtue of its status as a wholly-owned
      subsidiary of Gas (BVI).




Beijing
      Gas has subsidiaries, known as project companies, in four provinces, and four
      branch offices in Beijing. The project companies are the operating subsidiaries
      of Beijing Gas. Each project company operates as a local natural gas distributor
      in a city or county, which we refer to as an operational location, pursuant
      to
      an exclusive franchise agreement with the local government or entities
      responsible for administering and/or regulating gas utilities, pursuant to
      which
      Beijing Gas is granted the exclusive right to develop and operate natural gas
      distribution systems and distribute natural gas at the operational
      location.





We
      now
      have operations in Hebei Province, Jiangsu Province, Anhui Province, and Jilin
      province and in the suburbs of Beijing through our four branch offices in
      Beijing, We have operations in 18 cities in Hebei, 2 cities in Anhui, 3 cities
      in Jiangsu and 1 city in Jilin province. Most of them have an urban population
      of less than 300,000 and are experiencing quick urbanization. Hebei Province
      is
      the closest province to the Chinese Capital city Beijing, where our headquarters
      is located. Jiangsu Province and Anhui Province are two adjourning provinces
      in
      eastern China, which are close to Shanghai City. Jilin Province is located
      in
      North-Eastern China.


7




Each
      of
      the project companies is organized as a limited liability company under PRC
      law
      with Beijing Gas holding an equity interest of 85% to 100% and an individual
      shareholder nominally holding the remainder of the equity interest in such
      project company. Each such individual shareholder has relinquished any and
      all
      rights, power and interest of a shareholder in the respective project companies
      under enforceable contracts. This structure was intended to comply with a PRC
      law that required a limited liability company to have at least two shareholders,
      which requirement was removed in January 2006. Beijing Gas intends to cause
      the
      individual shareholders to transfer their shares in each of the project
      companies back to Beijing Gas in the near future.





In
      addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang
      Ke
      Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint
      venture entity engaged in the business of development, licensing and sale of
      oil
      and gas technologies and equipment, and sale of self-produced chemical
      preparation for use in the exploration process of oil field. We did not derive
      any material amount of revenues from this joint venture.





In
      2007,
      we made the following acquisitions:





On
      January 15, 2007, Beijing Gas acquired 100% equity interest of Beijing Chenguang
      Gas Ltd., Co. for a purchase price of 26,000,000 RMB (or approximately USD3.35
      million) in cash. Beijing Chenguang became a wholly-owned subsidiary of Beijing
      Gas. Beijing Chenguang is primarily engaged in the business of developing,
      transfer and licensing of technologies regarding natural gas purification,
      compression and transportation., as well as installation of natural gas
      equipment and supply of natural gas. Mr. Zhicheng Zhou, our Chief Operating
      Officer, owned 30% of Beijng Chenguang immediately prior to the acquisition.
      We
      made full disclosure under the heading “Certain relationships and related
      transactions” in this report.





On
      June
      20, 2007, Beijing Gas acquired 100% equity interest of Guannan Zhongyuan Natural
      Gas Co., Ltd. for a purchase price of 7,500,000 RMB (approximately $987,000)
      in
      cash. Guannan is a regional natural gas distributor and developer of natural
      gas
      distribution networks in China's Jiangsu Province. The acquisition of Guannan
      includes all of the assets and customer relationships of Guannan, including
      concession rights to be the exclusive natural gas distributor in Guannan County,
      Jiangsu Province, for a period of 30 years beginning June 29, 2007. This
      acquisition is not with related parties.




On
      July
      9, 2007, We purchased the assets of Baishan Gas Co., Ltd., a regional
      distributor and developer of distribution networks for natural gas in Jilin
      Province for a price of $921,000 (RMB7,000,000). Under the asset purchase
      agreement, we are responsible for paying outstanding debts of Baishan Gas Co.,
      Ltd. in the amount of $4,000,000, which are due in periodic installments through
      the year 2030. This acquisition is not with related parties.




**Our
      Industry**





***China’s
      Macro-Economic Environment for the Natural Gas Market***





Traditionally,
      the PRC has relied heavily on coal and crude oil as its energy sources.
      According to the China Statistical Yearbook, in 2004, coal, crude oil,
      hydro-electricity and natural gas accounted for 68.0%, 22.3%, 7.1% and 2.6%,
      respectively, of the PRC's total energy consumption. In 2005, the ratios were
      68.9%, 21.0%, 7.2% and 2.9% respectively. Natural gas has been primarily used
      as
      a raw material for chemical fertilizer and to operate oil and gas fields.
      Accordingly, most natural gas is consumed for production of fertilizer, while
      the non-production sector accounts for low percentage of final consumption.
      In
      2005, non-production consumption of natural gas was around 7.9 billion cubic
      meters, which was only a little over 15% of total natural gas consumption that
      reached to 47.9 billion cubic meters (Source: National Bureau of Statistics
      of
      China).


8





The
      PRC's
      heavy reliance on coal is out of line with world consumption rates for the
      same
      time period which was 26.5% in 2005 (Source: Energy Information Administration,
      U.S. Department of Energy). The use of coal, however, causes air pollution
      and
      other negative consequences to the environment. In the PRC, the heavy use of
      unwashed coal has lead to large emissions of sulfur dioxide and particulate
      matter. The latest air pollution study conducted by the Blacksmith Institute
      shows that in 2007 two of the 10 most polluted cities in the world are located
      in the PRC (Source: http://www.blacksmithinstitute.org). As such, there have
      been serious environmental concerns in many countries around the world and
      resulted in a global trend to reduce coal usage.





Recognizing
      the serious problems caused by heavy reliance on coal usage, the PRC government
      has aggressively moved to reduce coal usage by substituting coal with other,
      more environmentally friendly forms of fuel, such as natural gas. In
      consideration of such trends, the PRC set out a policy to raise the share of
      natural gas in the country's energy mix in its Ninth 5-Year Plan
      (1996-2000).  At the local government level, in many locations where
      natural gas supply is available, local governments often require all new
      residential buildings to incorporate piped gas connections in their designs
      as a
      condition to the issuance of the construction or occupancy permits. Before
      2000,
      the gas distribution had principally been served by local municipal governments.
      Since then, the industry has been open to private sector, whose investments
      have
      fostered the wide use of natural gas in the PRC. The natural gas industry has
      been deemed by the PRC government as a suitable industry for public and private
      investments.





***Demand
      for Natural Gas in China***




Currently,
      natural gas consumption in the PRC accounts for less than 3% of its total energy
      consumption. However, driven by environmental pressure from the demand side
      and
      improvements in social infrastructure with economic growth, in the west in
      particular, and stable energy supply, it is anticipated that the use of natural
      gas will grow very rapidly in the PRC. According to the statistics of the China
      National Development and Reform Commission (“NDRC”), the consumption of natural
      gas as increased from 24.5 billion cubic meters in 2000 to 47.9 billion cubic
      meters in 2005, which represented an average growth of 14.35% per year.
      According to a research report by Merrill Lynch, demand for natural gas will
      increase from 16 billion cubic meters in 2005 to 70 billion cubic meters in
      2020, representing a compounded annual growth rate of 10.3%.





***China’s
      Natural Gas Reserves and Gas Pipeline Infrastructure***





The
      PRC
      abounds in rich natural gas reserves, which are distributed principally in
      Xinjiang, Sichuan and Inner Mongolia in western and north-central China.
      According to the statistics of the Energy Information Administration, proved
      natural gas reserves in China are estimated to be 53,325 billion cubic feet
      in
      2006, and 80,000 billion cubic feet in 2007.




Because
      the PRC’s largest reserves of natural gas are located in western and
      north-central China, it requires a significant investment in gas transportation
      infrastructure to carry natural gas to eastern cities and the rest of the PRC.
      Until recent years, the PRC’s natural gas consumption was limited to local
      natural gas producing provinces because of the lack of national long-distance
      pipeline infrastructure.




The
      principal method for transportation of natural gas from a source to end users
      is
      by means of pipelines. In order to develop the natural gas industry, it is
      essential that the necessary pipeline infrastructure be in place so that natural
      gas is easily accessible for distribution to end users at affordable
      cost.




Under
      with the PRC government’s Tenth 5-Year Plan (2001-2005), the country’s longest
      pipeline, known as the West-East Pipeline, was constructed and went into
      operation in January 2005. It transports natural gas to demand centers in the
      southeast from deposits in the western Xinjiang province to Shanghai, picking
      up
      additional gas in the Ordos Basin along the way. The full length of the pipeline
      is about 4,200 km with a designed annual throughput capacity of 20 billion
      cubic
      meters, a delivery pressure of 10 megapascals and 35 processing stations
      along the pipeline.


9




There
      are other pipelines linking smaller natural gas deposits to consumers, such
      as
      the pipeline linking the Sebei natural gas field in the Qaidam Basin with
      consumers in the city of Lanzhou, Ganshu province in the northwest, and a
      pipeline linking natural gas deposits in Sichuan province in the southwest
      to
      demand centers in Hubei and Hunan provinces in the central PRC.




In
      its Eleventh 5-Year Plan (2006 - 2010), the PRC government re-affirmed its
      commitment to making significant investments in the expansion of the natural
      gas
      pipeline infrastructure over a period of 20 years.





***Natural
      Gas Suppliers***





The
      natural gas supply in China is dominated by the three large state-owned oil
      and
      gas holding companies, namely China National Petroleum Corporation Group
      (“PetroChina”), China Petroleum and Chemical Corporation Group (“Sinopec”), and
      China National Offshore Oil Corporation Group (“CNOOC”). In 2006, production by
      CNPC, Sinopec and CNOOC accounted for 73.7%, 14.1% and 12.2%, respectively,
      of
      the total national production. CNPC and Sinopec own and primarily operate
      onshore pipelines while CNOOC owns and operates virtually all off shore
      pipelines (Source: The Institute of Energy Economics of Japan).





***Natural
      Gas Distributors***





Before
      2000, natural gas distribution had been principally served by local municipal
      governments. Since then, natural gas industry has been designated by the PRC
      government as a suitable industry for public and private investment and has
      been
      open to private investment which has fueled the development of the industry
      and
      fostered a wider use of natural gas in the PRC. In large cities where the
      population exceeds 100,000, the natural gas distribution business is dominated
      by state owned companies, while in cities where the population is less than
      100,000, natural gas distribution is carried out by many privately owned
      companies, most of which operate in just a few locations.





***The
      Gas Delivery Process***





The
      natural gas delivery process is categorized by three segments: production,
      transmission and distribution, as shown in the chart below:


10









Production
      involves underground exploration, drilling, extraction and purification of
      the
      natural gas. After extraction from a gas well, natural gas is transported to
      nearby refineries for removal of water and other impurities. The natural gas
      is
      then transported from the refineries via long distance pipelines under extremely
      high pressure facilitating the supply to a large number of locations near these
      pipelines at high speeds. The long distance pipelines are owned and operated
      by
      PRC state owned oil and gas exploration and production companies such as Sinopec
      and PetroChina.





Distribution
      companies (such as our company) distribute natural gas to end users and often
      own the gas pipeline infrastructure rights of an operational location (including
      the local pipelines, the processing stations, and the branch pipelines). A
      distribution company purchases natural gas from oil and gas exploration and
      production companies. The distribution company determines the method of
      delivering natural gas to its desired destination after taking into account
      factors such as the distance between the stations along the major pipeline
      and
      delivery points and the expected demand for gas from the relevant gas supply
      locations.





The
      transportation of CNG and LNG involves the delivery of natural gas by trucks
      from gas wells or stations located along the relevant long distance pipeline
      to
      a processing station. Such processing stations may contain CNG or LNG pressure
      regulating facilities which will depressurize the CNG or LNG to reduce the
      pressure of natural gas from high pressure to medium pressure, before
      transferring the natural gas to a local pipeline.


11





The
      processing station is usually located on the outskirts of an operational
      location for safety reasons and it provides certain ancillary
      facilities:





To
        add bromine to the gas to enable the detection
        of leakages when the gas is transmitted through the pipelines,
        and
  To
          store gas under high, medium or low pressure
          to be used as reserves for future unexpected fluctuation in
          demand.




High
      pressure gas storage tanks usually have thicker walls and therefore, are more
      expensive to construct than gas storage tanks for storage of gas under medium
      or
      low pressure.





After
      processing, the gas is transmitted under medium pressure to the local pipelines.
      Local pipelines are laid within an operational location and represent the
      backbone of the local gas delivery system. Different sections of the local
      pipelines operate at slightly different pressures, with computer controlled
      regulators controlling the flow of natural gas for delivery to end users via
      the
      branch pipelines and customers’ inlets.




When
      there is a demand for a connection of gas to a particular area within a gas
      supply location, the distribution company will invest in the construction of
      the
      branch pipelines to connect the local pipelines to the pressure regulating
      boxes
      located in the end-users’ buildings or premises. The pressure regulating box
      reduces the natural gas to a lower pressure before the natural gas is
      transmitted to the customers’ inlets. Customers’ inlets transmit the natural gas
      through the pressure regulating box to the end users.





**Our
      Strategy**





Our
      strategy involves a plan: (i) to expand our presence in smaller cities; (ii)
      to
      acquire existing gas distribution systems and/or franchises; and (iii) to expand
      our business upstream by developing and maintaining pipelines that connect
      China’s East-West Gas Pipeline with the cities where we have our gas stations or
      where other distributors own distribution networks.





***(i)
      Expand Our Presence in Smaller Cities; by Obtaining Additional Exclusive
      Franchises.*** We have focused on small (with urban dwellers in the city proper less than
      100,000) and medium sized (with urban dwellers in the city proper less than
      300,000) , generally near a larger metropolitan area where there is little
      competition to obtain a franchise, and where our franchise grants us
      exclusivity. In such places in the PRC, we are in a better position to obtain
      exclusive natural gas distribution system development and supply franchise
      agreements in negotiating with the cities, which urgently need to provide their
      citizens with energy, and usually do not have the leverage of very large cities,
      which can attract multiple bidders for their franchises. Accordingly, we require
      and receive an exclusive franchise entitling us to be the sole natural gas
      utility in such city. Usually, our franchises are for a period of 25-30 years.
      Since our founding, we have successfully obtained 26 franchises in small and
      medium sized cities, of which 24 have already developed and 2 are still under
      development. In 2007 alone, we were able to secure 5 development projects.
      We
      plan to obtain and develop 5-8 of such projects per year.





***(ii)
      Acquire Existing Franchises and Gas Distribution Networks to Facilitate
      Growth.*** Our expanded presence in small and medium sized cities was accomplished not
      only
      by securing franchises and developing gas distribution networks ourselves but
      also by acquiring existing franchises and networks from other operators. Of
      the
      five locations we added in 2007, three were acquired. We believe acquisitions
      will provide us opportunities for growth ****** as well as enable us to explore opportunities in bigger cities (with urban
      dweller in the city proper more than 300,000). We are now targeting companies
      that have good assets and market prospect with strategic locations but less
      burdened with employees retirement liabilities. We have identified several
      targets and are negotiating with some of them. We expect to complete a
      significant acquisition in the near future.




12




**(iii)**  ***Expand
      into Upstream Business*** .
      We currently develop gas distribution networks which deliver gas from our
      storage station in a particular city to residential or industrial customers
      in
      that city. We do not have pipelines that connect the national main pipeline
      that
      runs across China from the West to the East with the cities where we our
      customers are located. We have to deliver the gas we purchase from the main
      pipeline operator to our gas storage facilities in different cities by trucks.
      We intend to expand into upstream business by developing regional distribution
      networks to connect West-East main pipeline with cities that are not located
      near the passageway of the national main pipeline. By developing and maintaining
      regional pipelines, we believe we can deliver natural gas to our customers
      more
      efficiently and with potentially higher margins. In addition, such regional
      distribution networks can be used by other gas distributors along the pipelines,
      which will add potential revenue sources for us. As the development of such
      regional networks require a significant capital outlay, we intend to start
      exploring such projects after we raise a significant amount of funds in the
      future.





***(iv)Raise
      Additional Capital .*** We are in a very capital-intensive business due to the fact that a major part
      of
      our activities is to build local natural gas distribution networks which
      requires a larger capital outlay. Our estimated capital needs for developing
      a
      natural gas distribution networks for a specific location are approximately
      $5
      million. We plan to undertake 5-8 projects per year. Therefore, we need
      approximately $40 million of capital per year. Although the connection fees
      we
      charge our customers provide us with the needed capital for building local
      natural gas distribution networks to a large degree, they may not provide
      sufficient capital if we carry out the acquisitions and upstream expansion
      as we
      have planned. Our growth will, therefore, depend heavily on our ability to
      raise
      additional funds. We anticipate using our financing strategy as a competitive
      tool. Our goal is to duplicate the type of financing and related financial
      instruments used by utilities in the United States, including the issuance
      of
      subsidiary level, non-recourse debt, preferred stock and holding company fixed
      income issuances. Such a financing plan can not only give us a favorable cost
      of
      capital, but enhance investor returns and keep investor dilution at a
      minimum.





**Competitive
      Advantages**





We
      believe we have the following competitive advantages:





**(i)**  ***Better
      Relationship with Natural Gas Suppliers*** .
      Many of our employees are former employees of SinoPec and PetroChina. Therefore,
      we have been able to secure contracts with these large state owned natural
      gas
      producers. These contracts have ensured a stable supply of natural gas for
      us.





***(ii)
      Experienced Management and Technical Personnel.*** **** We
      have a team of senior executives who are industry experts in managing larger
      Chinese petroleum and/or gas companies with scores of years of combined
      experience in running our company or managing business in this industry. Our
      founder and Chief Executive Officer, Mr. Yuchuan Liu, is a natural gas industry
      expert with over 20 years experience in senior management positions at
      PetroChina and China Gas Holdings Limited, a Hong Kong Stock Exchange-listed
      PRC
      company. Our Chief Operating Officer, Mr. Zhicheng Zhou, served as the director
      and General Manager of Beijing Chenguang Gas Co., Ltd. from late 2002 to 2006.
      Our Chief Engineer, Mr. Shukui Bian, is one of the draftsmen of the PRC national
      standard for urban gas supply, and was previously the chief executive officer
      of
      the First Oil Extraction Plant of North China Oilfield. Our company was one
      of
      the earliest to engage in the natural gas distribution business in small and
      medium sized cities, and thus having gained significant experience in this
      market segment.





**(iii)**  ***Experienced
      Sales and Marketing Team*** .
      Our sales and marketing team has gained significant experience in working with
      local governments and identifying potential markets in small and medium sized
      cities. Due to their effort, we have won franchises for more than 25
      locations.




13




**(iv)**  ***US
      Capital Market Access*** .
      By becoming a US public company, we have gained access to the US capital market,
      which is the biggest and most efficient. We will be able to raise funds, as
      we
      have done, for our expansion and growth albeit our ability to raise funds in
      the
      US is a limited one because we have not been listed on any major US national
      stock exchanges. Very few Chinese companies that are in the natural gas
      distribution business have become a US public company.





**Products
      and Services**





Currently,
      we generate revenues primarily from the connection fees we charge our customers
      for connecting their appliances to the pipelines in our natural gas distribution
      systems which we have constructed, and fees for natural gas we charge our
      customers based on usage.





Historically,
      connection fees and fees of natural gas usage have constituted more than 90%
      of
      our revenues. We recorded connection fees in the amounts of $12.97 million
      and
      $7.22 million for the fiscal years ended December 31, 2007 and 2006,
      respectively, constituting 64% and 66% of total revenues for those years. Sales
      of natural gas were $7.29 million and $3.65 million for the fiscal years ended
      December 31, 2007 and 2006, respectively, constituting 36% and 34% of the total
      revenues for those years.




***Connection
      Fees***





We
      charge residential customers a flat connection fee for connections to our
      customers’ gas appliances, typically including cooking stoves, water heaters and
      boilers. The level of connection fees varies among operational locations and
      is
      determine based on a detailed analysis of factors such as estimated capital
      expenditure, fees charged in surrounding cities, number of users, expected
      penetration rates, income levels and affordability to local residents and is
      approved by the relevant local state price bureau. The average of these
      connection fees for the company in 2007 was approximately $286.4 per household.
      For industrial customers, the connection fee is determined based on the facility
      capacity (on a cubic meter per day basis 300 RMB per cubic meter). Should
      additional capacity be needed, these customers are required to pay additional
      connection fees for the additional capacity installed. Connection fees are
      usually paid in installments, with 30% upon signing, 30% at milestones set
      out
      in the contracts, 30% upon completion and 10% guarantee which is paid after
      one
      year. Connection fees generally provide a 60-80% profit margin. The rates of
      connections fee are set by the local state price bureau based on the connection
      fees charged by other gas distributors in surrounding areas and can vary in
      different cities. In most cases, we accept the price set by the local state
      price bureau. But if we find the price does not offer a profit margin equal
      or
      greater than 20%, we will negotiate with local governments for an increase.
      The
      local governments usually agreed to increase our connection fees under such
      circumstances Our average connection fee per household is about $276 and the
      connection fee in most cities is very close to that average. Gas usage fees
      are
      also subject to the approval of the local state price bureau. Future price
      increases are also subject to the same approval process. In considering
      applications for an increase in gas usage charges, the local state price bureau
      may consider factors such as increases in the wholesale price of gas or
      operating expenses, inflation, additional capital expenditure, and whether
      the
      profit margin remains fair and reasonable.





When
      entering into master supply contracts for mass connections, we usually require
      the payment of deposit from customers while the balance is payable in accordance
      with the terms set out in the contracts. In the event customers default in
      the
      payment of connection fees, we will not start the supply of natural gas until
      the connection fees are paid.




The
      deposit received from customers upon the signing of supply contracts generally
      funds the majority of our capital costs in any new operational
      location.





***Gas
      Usage Charges*** ****





We
      arrive at gas usage charges after taking into consideration the wholesale price
      of gas, operating costs, price of substitute products, internal business model
      margins and the purchasing power of local residents. Gas usage charges are
      based
      on actual usage on a per cubic meter basis. The gas usage charges per cubic
      meter vary between operational locations and the payment mechanism between
      different categories of customers varies.


14




Since
      our inception, the majority of our residential customers have purchased gas
      units in cash at our sales outlets with details of the prepaid gas units stored
      electronically on a debit card. The debit card is inserted into a debit card
      debit gas meter installed at the end user’s premises to activate the gas supply.
      Units of gas used are deducted from the debit card. When the level of prepaid
      gas units drops to a certain level (currently pre-set at three cubic meters),
      the gas meter will produce a sound signal to remind the customer to replenish
      the value stored in the debit card. Over 85% of our residential customers
      utilize the debit card payment method. This payment method provides significant
      advantages to us as all gas purchases are prepaid - not at the point of sale
      or
      in arrears.




For
      those residential customers without a debit card gas meter installed and for
      commercial and industrial customers, payments for natural gas usage are made
      in
      arrears. Gas meters that record actual gas consumption are installed at the
      end
      users’ premises and meter readings are taken physically by our staff every
      month. Monthly bills based on the prior month’s actual usage are then sent to
      customers. In the event customers default in payment of gas usage charges,
      gas
      supply will be suspended within one month of billing.





**Our
      Business Activities**





Our
      major business activities include development and construction of local gas
      distribution networks, transportation of natural gas from suppliers to our
      storage facilities in a given operational location, and operating and
      maintaining the gas distribution networks.





***Development***





(i) *Identifying distribution opportunities in new operational
      location:* Our business development team actively explores and identifies suitable areas
      of
      service by conducting market research on potential operational locations where
      the demand for piped natural gas is desired. Because of our experience and
      ongoing cooperation with governmental authorities, we also receive invitations
      from local governments to bid for new natural gas projects or to take over
      existing natural gas projects.




As
      the piped natural gas supply industry in the PRC is still in the early stages
      of
      development, most areas in the PRC are not yet supplied with piped natural
      gas
      even though they may be in close proximity to natural gas sources. Due to the
      capital intensive nature of new natural gas distribution projects, we are very
      selective in our choices for new operational locations.





The
      selection of new operational locations is determined after conducting
      preliminary evaluation and studies on the target locations, and return on
      investment. The criteria for any potential operational location that are
      investigated and documented by us are:





1.
            Size
                and density of population.




2.
            Economic
                statistics of the targeted
                locations.




3.
            Extent
                and concentration of industrial and commercial
                activities.




4.
            New
                property development in the target
                location.




5.
            Projected
                levels of connection fees and gas usage
                charges.




15




6.
            Extent
                of the local government’s commitment to environmental protection,
                environmental policies in place, and the local population’s awareness of
                environmental issues.




7.
            Likelihood
                of exclusive operational rights and preferential treatment on tax
                and
                governmental fees.




8.
            Types
                of gas supply (piped natural gas, CNG or LNG) and methods of delivery.
                CNG
                trucks are deployed if the gas source, or long distance pipeline,
                is
                located within 300 km. Generally, LNG trucks are used if the gas
                source,
                or long distance pipeline, is located beyond 300
                km.





9.
            For
                an acquisition of existing natural gas projects, the cost of acquisition,
                quality of assets and/or business are also valued. In addition, the
                liabilities of the business are analyzed along with any other perceived
                or
                actual problems encountered.





Based
      on the findings of the investigation, our business development team will decide
      whether to make a recommendation to management for approval to proceed with
      discussions and negotiations on a new project. We have conducted dozens of
      preliminary evaluations since our inception in 2003. We have an aggregate of
      24
      completed or partially completed operational locations.





*(ii)
      Securing a New operational location.* Once we have approved a potential natural gas distribution project in an
      operational location, we normally set up a local independent subsidiary, also
      know as a project company, to administer the project for its lifetime. We then
      prepare and submit a detailed gas project proposal to the local government
      and
      commence negotiations on major issues such as the granting of exclusive rights
      or rights of first refusal to supply gas to that location, proposed connection
      fees and gas usage charges and whether any tax and other concessions or
      favorable policies will be granted by the local government. Once established,
      the project company will conduct a series of marketing and promotional campaigns
      (which may include joint promotional campaigns with the local government) to
      increase public awareness of piped natural gas in the operational location.
      Concurrently, we begin actively seeking out potential customers in the
      operational location and negotiate the terms of supply contracts with the aim
      of
      entering into supply contracts as soon as possible with such
      customers.




(iii) *Construction.*





*(a)
      Design stage.* **** The
      design of the gas pipeline infrastructure for a natural gas distribution project
      includes the processing stations, the local pipelines and other ancillary
      facilities such as gas storage tanks. It is carried out by a government approved
      design institute in accordance with our requirements and specifications. It
      also
      takes into account the local population size, the development of the economy,
      the utilization of energy resources and the environmental conditions. The master
      design is subject to approval by the local city construction department. The
      design stage normally takes two to three months.




*(b)
      Construction Stage.* **** Once
      the design is approved, we invite independent qualified contractors to tender
      bids for the construction work. The selection criteria for the contractors
      include their qualifications, experience, expertise, reputation, familiarity
      with the local environment, prior experience with us and price. We generally
      enter into turnkey contracts with independent contractors for construction,
      installation and maintenance of the natural gas pipelines. We pay a down payment
      with the remainder to be paid upon completion of the project. At the time of
      entering into turnkey contracts, we source raw materials such as piping, gas
      regulating equipment and machinery. We have strict quality control procedures
      for the sourcing of supplies for all construction purposes.




16




Our
      internal engineers and independent external inspectors monitor the entire
      construction process to ensure that each stage of construction meets our quality
      and safety standards and the relevant regulatory requirements.





For
      a given operational location, although the gas pipeline infrastructure is
      designed to cover the entire operational location, our construction program
      focuses on early gas delivery to areas of concentrated customer demand within
      such operational location. This ensures that natural gas supply can begin as
      soon as the essential gas pipeline infrastructure and facilities such as the
      processing stations are completed. Construction work in a target area will
      gradually extend to cover the whole operational location, which typically takes
      two to five years.





***Operation***





Once
      the necessary gas pipeline infrastructure is in place in a given operational
      location, we begin the design and construction of the branch pipelines and
      customers’ inlets pursuant to gas supply contracts with customers. The designs
      of branch pipelines and customers’ inlets are normally prepared by us, reviewed
      by a government approved design institute, and carried out by external
      contractors. Upon completion of the construction of the branch pipelines
      and customer inlets in the operational location, we begin to supply and sale
      natural gas and related services to customers within the operational location
      pursuant to supply contracts with such customers. The natural gas to be supplied
      to the residential or industrial customers is carried by trucks with canisters
      that contain CNG or LNG, to our storage facilities in various operational
      locations for storage, decompression and gasification. From those storage
      facilities, the gas is transported through our pipeline system to our end
      users.




**Intellectual
      Property**





We
      do not hold any registered trademarks or patents. We have developed a
      proprietary natural gas compression process that allows us to effectively and
      economically compress natural gas and distribute it. .





We
      own and operate a website under the internet domain name
      www.sino-gas.com.





**Research
      and Development**





We
      have eight full-time employees engaged in the company-sponsored research
      and development efforts. These employees specialize in the fields of energy,
      mechanical and electronic engineering. For the fiscal year ended December 31,
      2007 and 2006, $1,013,400 and $543,500, respectively, on R&D activities.
      Areas that are targets of our ongoing research and development activities
      include:





Methodology
        and practices to increase operating efficiency and safety
        standards.
  Expansion
          of the applications for natural gas, such as gas-fuelled air conditioners,
          washing machines and dryers, and the use of CNG in motor
          vehicles.




Improvements
        in gas storage and transportation systems especially the reduction of the
        size
        of the storage facilities.




**Sales
      and Marketing**





Our
      main sales office, which is located in Beijing, has three staff led by the
      Vice
      President of Marketing and is responsible for managing our overall sales
      policies and devising our marketing strategy. They are responsible for
      developing and maintaining accounts with major industrial customers and large
      real estate developers. They regularly visit potential customers and conduct
      meetings with them to see if there is need and to introduce the advantages
      of
      using natural gas.




17




We
      have approximately 25 sales and marketing staff at our operational locations
      who
      target residential customers by working with local neighborhood committees
      and
      government agencies. In addition, they coordinate with our national office
      in
      with national office in targeting industrial customers and local developers.
      We
      establish a project company at each operational location and the local sales
      and
      marketing team for each project company works together with the main office
      team
      to structure an appropriate plan accommodating the specific needs and
      circumstances of the operational location. Our marketing team plays an active
      role in lobbying the relevant government authorities during the negotiation
      stage.





The
      sales and marketing team is responsible for company image and brand building,
      as
      well as promoting the advantages and concept of using natural gas as a necessary
      part of modern day life. Once established, a project company will implement
      a
      series of promotional campaigns (which may include joint promotional campaigns
      with the local government) to increase public awareness of piped natural gas
      in
      an operational location. At the same time, the project company begins to
      actively seek out potential customers in the operational location and negotiate
      the terms of supply contracts with the aim of entering into supply contracts
      with such customers as soon as possible.




**Our
      Customers**





We
      have two principal types of customers: (i) residential customers and (ii)
      industrial customers.





***Residential
      Customers*** ****





Natural
      gas is primarily used by residential owners for cooking as well as water and
      space heating. We market directly to property developers, government departments
      and organizations, private companies and state-owned enterprises, as these
      entities enter into master supply contracts with us for the connection of gas
      to
      all the units within a residential development (new or existing, owned by such
      entities or their respective employees). These entities are responsible for
      making, or they coordinate with the end users to facilitate our efforts in
      collecting the advance payment of connection fees, while gas usage charges
      are
      paid by the individual end users. With new residential developments, connection
      fees are collected in advance by an installment of 30% upon the signing of
      the
      contracts. An additional 30% is colleted at milestones set in the contracts
      and
      an additional 30% is collected upon completion of the project. Usually, we
      will
      have collected ninety percent payment of connection fees by the time when
      construction is completed regardless of whether the units are sold or occupied.
      The remaining 10 percent is paid one year after the completion and any deduction
      of warranty expenses. The actual supply of gas commences after the unit is
      occupied.




We
      also connect to existing buildings formerly without piped natural gas supplies.
      Representatives of the buildings will consult individual households as to
      whether they wish to have piped natural gas supply and coordinate the collection
      of connection fees from the end users on our behalf. Both connection fees and
      gas usage charges are payable in advance by the individual end users. We build
      pipelines to connect these customers to our gas storage facilities and supply
      gas at market price after receiving payment. The inlets that are located inside
      the home and gas appliances are owned by the end users, with one-year quality
      guarantee by us. We maintain the pipelines outside the end user’s homes. The
      contracts are generally renewable on a yearly basis.


18




At
      present, we have approximately 317 master supply agreements for the supply
      of
      gas to 63,000 end users in Beijing Hebei, Jiangsu, Jilin and Anhui. Our top
      five
      residential customers, who are developers or owners of residential areas, are
      shown below:




Percentage
                of Connections
              Fees
                for the year ended
              December
                31,Customers
            
            2007
            
            2006Shanghai
                Datun Energy Holdings
            
            
            21.28
            %
            
            36.43
            %Huabei
                Oil Management Bureau
            
            
            12.06
            %
            
            -
            %Hebei
                Ji Heng Yuan Group
            
            
            5.47
            %
            
            -
            %Shi
                Jia Zhuang Jin Shi Real Estate Co.
            
            
            3.84
            %
            
            -
            %Jinzhou
                Real Estate Co.
            
            
            3.12
            %
            
            -
            %Total
            
            
            46.83
            %
            
            *65.24
            %


*
      the percentage of the top five of 2006





***Industrial
      and Commercial Customers*** ****





Our
      industrial customers use natural gas primarily for heating, air conditioning,
      water heating and cooking purposes. These customers we target include owners
      of
      hotels, restaurants, office buildings, shopping centers, hospitals, educational
      establishments, sports and leisure facilities and exhibition halls. Natural
      gas
      has a wide variety of applications for industrial customers such as fuelling
      industrial boilers, furnaces, ovens, incinerators, foundries and steamers as
      well as water and space heating in staff canteens and dormitories within the
      industrial customers’ premises. We enter into supply contracts with these
      customers for the distribution of gas to their premises, and both connection
      fees and gas usage charges are borne by such customers.





The
      table below presents information about our industrial customers for the periods
      indicated:




Percentage of Sales
              Fiscal year ended
              December 31,Customers
            
            2007
            
            2006Hebei
                Zhong Gang Steel
            
            
            30.4
            %
            
            51.78
            %Tang
                Shan Chang Sheng
            
            
            4.00
            %
            
            9.04
            %Elite
                (Lang Fang) Textile
            
            
            0.90
            %
            
            0
            %Huabei
                Machine Factory
            
            
            2.88
            %
            
            0
            %Hebei
                Ji Heng Yuan
            
            
            0.76
            %
            
            0
            %Total
            
            
            38.87
            %
            
            61.02
            %





During
      the fiscal year ended December 31, 2007, our largest two customers were Heibei
      Zhong Gang Steel and Tang Shan Chang Sheng.





**Materials
      and Supplies**





***Natural
      Gas***





The
      principal supplies purchased for our business are natural gas, pipes, machinery
      and equipment. Purchase of natural gas represented 67.1% and 65% of our total
      purchase of supplies for the fiscal years ended December 31, 2007and 2006,
      respectively. Generally, approximately 99% of the natural gas we purchase is
      CNG
      and approximately 1% is LNG.





Our
      principal CNG supplier has been the Fourth Oil Extraction Plant of the North
      China Oilfield (the “North China Oilfield”), a subsidiary of PetroChina. Our LNG
      supplier has been Henan Zhong Yuan Lu Ye Advanced Technology Ltd. Co. (“Henan
      Zhong Yuan”), a subsidiary of SinoPec. Historically, we have purchased
      approximately 90% of our total purchases of CNG from North China Oilfield and
      100% of our total purchases of LNG from Henan Zhong Yuan.




19




We
      have supply contracts (with terms from 1 to 3 years renewable but no fixed
      price, which price is set indirectly by the PRC National Development and Reform
      Commission (“NDRC”) irregularly and can be passed along to the end customers)
      with these suppliers and have not experienced any shortage of natural gas supply
      in the past. To prepare for growth, we have also entered into agreements with
      new suppliers to meet our growing demands.  These contractual relationships
      with our suppliers allow us to pursue natural gas distribution projects in
      a
      wide range of operational locations.





The
      wholesale price of natural gas is agreed upon between the suppliers and us
      with
      reference to the wellhead price which is determined by NDRC with approval from
      the PRC State Council, distance of transportation, purification fees and the
      supplier’s operating costs. The wellhead price of natural gas is currently set
      at $0.12 per cubic meter with a 10% allowance for upward or downward adjustments
      as a result of negotiations between suppliers and distribution companies, such
      as Beijing Gas. Generally, we are only required to pay for the actual quantity
      purchased and there is no penalty should we purchase less than the stated
      amount.




***Piping,
      Machinery and Equipment***





Piping,
      machinery and equipment constitute 60-70% of our construction cost. We purchase
      such supplies through a bidding process which is administered by the procurement
      committee. Potential suppliers are evaluated on their proposed terms including
      technical specifications, price, payment terms and post-sale services and the
      procurement committee keeps a scoring system based on these parameters. After
      validation of the various suppliers’ service and capabilities for stable supply,
      we acquire the needed materials and parts from the supplier offering the best
      terms.




We
      purchase pipes of various size and thickness domestically for installation
      in
      different segments of our natural gas pipeline infrastructure according to
      specifications that comply with PRC standards and regulations. Payments for
      equipment, pipes and machinery are purchased with credit terms ranging from
      30
      to 90 days. We generally do not purchase gas appliances except gas meters which
      we purchase in bulk directly from manufacturers in China and maintain a limited
      inventory of them. We also provide repair and maintenance service to the gas
      appliances supplied. We generally provide a one-year warranty of our gas
      distribution system to our customers, during which time we provide free
      check-ups of the pipeline and repair for any appliances we
      provided.





In
      2007, we purchased approximately $11,242,557 of pipes, machinery and
      equipment.




**Competition**





Since
      our inception, we have focused on supplying natural gas to small and medium
      sized cities in the PRC where the average urban residents in the city proper
      is
      300,000 and below, where the natural gas penetration rate is typically 0%,
      and
      where we are able to obtain exclusivity for natural gas distribution from the
      local government. In entering into these small and medium sized cities, we
      are
      generally authorized to be the sole supplier of natural gas by the local
      governments pursuant to franchise agreements for a typical term of 25 to 30
      years. This differs from the bigger natural gas distribution companies which
      have focused on a few areas with large populations. The larger cities are very
      competitive markets that tend to offer less flexibility for advantageous pricing
      arrangements. For a typical small city project, our initial investment is only
      about $500,000 with an average internal rate of return of 31% over the life
      of
      the project. Due to our smaller city focus where the operating cost is low
      and
      competition is much less intense, we believe we generate profit margins and
      returns at or above industry-average levels.





As
      we compete principally with small- to medium- sized private companies in the
      natural gas distribution industry, the information about our competition and
      competitive position is limited. Based on the information available to us,
      we
      estimate that there are approximately 200 small- to medium- sized private gas
      distribution companies in the PRC. Most of these companies target local towns,
      rather than take the approach that we do, of targeting cities in different
      provinces. Also, most of these companies operate an average of three or four
      natural gas distributions systems, as compared to the 20 natural gas
      distribution systems that we operate.




20




Based
      on the division of the administrative districts in the PRC as of December 31,
      2005, it has been estimated that there are approximately 2,862 smaller cities
      in
      the PRC with urban dwellers in the city proper between 100,000 to 300,000.
      Among
      them, approximately 800 smaller cities have the potential to be supplied with
      natural gas and 100 smaller cities have already been supplied with natural
      gas.
      Among the 100 smaller cities where natural gas is already available, Beijing
      Gas
      is the distributor to 24 of them, and, therefore, we believe we have the largest
      market share among our peer businesses that target the natural gas market among
      smaller cities.




We
      believe compete with the following companies directly:




Ticker
            
            06 Revenue
              (in
              $millions)
            
            06 Net
              Income
              (in
                $millions)Towngas
                China Co., Ltd (Panva Gas)(1)
            
            
            1083.HK
            
            
            409
            
            
            19Xinao
                Gas Holdings Ltd(2)
            
            
            2688.HK
            
            
            *296
            
            
            *32Shanghai
                Tongda Energy Group(3)
            
            
            
            
            
            **560
            
            
            **25China
                Gas Holdings Limited(4)
            
            
            0384.HK
            
            
            **125
            
            
            **9Zhengzhou
                Gas Co. Ltd(5)
            
            
            3928.HK
            
            
            *63
            
            
            *10


*
      By the end of June 30,
      2007                                                  **
      By the end of September 30, 2007





(1)
      Towngas China Company Ltd., formerly Panva Gas Holding Limited, is supplier
      of
      gas, including liquefied petroleum gas (LPG) and natural gas in eight Chinese
      provinces, where over 40 companies of the Group are providing gas fuel
      services.





(2)
      Xinao Gas Holdings Limited is principally engaged in the investment in, and
      the
      operation and management of, gas pipeline infrastructure and the sale and
      distribution of piped and bottled gas in China with operations in four
      divisions: gas connection, sales of piped gas, distributions of bottled LPG
      and
      sales of gas appliances.





(3)
      Shanghai Tongda is engaged in the construction and operation of urban CNG,
      LNG,
      and LPG. It operates in over 15 cities across provinces through 15
      subsidiaries.





(4)
      China Gas Holdings Limited (China Gas) is an investment holding company. The
      Company is an operator of natural gas services principally engaged in the
      investment, operation and management of city gas pipeline infrastructure,
      long-distance, high-pressure pipelines, distribution of natural gas to
      residential, commercial, industrial and vehicle users, construction and
      operation of oil stations, and gas stations, as well as liquefied natural Gas
      (LNG) liquefaction plants, and development and application of oil and natural
      gas related technologies. The Company has four operating divisions: property
      investment, financial and securities investment, gas connection and sales of
      piped gas.





(5)
      Zhengzhou Gas Company Limited is an investment holding company. The Company
      is
      principally engaged in the sales of natural gas, pressure control equipment
      and
      gas appliances to customers, and the construction of gas pipelines and the
      provision of repairs and maintenance of gas pipelines services. The gas
      appliances available for sales include gas stoves, water heaters and
      wall-attached stove.


21




**Safety
      and Quality Control**





***Safety
      Control***





We
      are
      focused on safety, have implemented a safety system and set up a safety
      department to oversee safety issues for all of our operations. We carry out
      routine inspection of the branch pipelines, customers’ inlets, gas meters and
      gas appliances at the customers’ premises twice annually. These semi-annual
      inspections are free unless major repairs are required in which case we charge
      the customers for labor, replacement parts and other materials used for the
      repairs.





We
      believe in educating users about safety procedures. Before gas is actually
      supplied, we provide a thorough explanation of safety procedures to end users,
      hold regular seminars, and distribute brochures and booklets on safety. We
      have
      a 24-hour telephone help line for enquiries and reporting of emergency
      matters.





In
      order
      for us to monitor the operations of the pipelines for abnormal gas usage, gas
      leakages, or any other irregularities, we collect information about the
      temperature, pressure and volume of gas from key points along the local
      pipelines. The information is collected in the control center located in the
      head office of each operational location for analysis. We use process control
      instruments known as Supervisory Control and Data Acquisition systems, in which
      a number of small detectors are installed along the pipelines to collect
      information and process the data electronically in real time at the control
      center. Each project company conducts a major inspection of its pipelines,
      processing station(s) and other equipment at least once annually. If gas
      leakages or any other irregularities are detected, we will take remedial action
      immediately.




Due
      to
      the strict implementation of safety control procedures, there have been no
      major
      accidents which have resulted in serious injury or death since our
      inception.





***Quality
      Control***





Quality
      control begins in the design and construction phase of the natural gas supply
      infrastructure. Our quality control team regularly makes inspection visits
      and
      conducts tests to ensure that the construction work meets our required standards
      as well as national and local regulations.





We
      also
      have strict quality control procedures for the sourcing of raw materials. We
      only purchase from our approved list of qualified suppliers and such suppliers
      have fulfilled the relevant requirements in accordance with national
      standards.





In
      order
      to monitor the quality of gas purchased by us, we obtain gas composition reports
      regularly from our gas suppliers with data on important measures such as the
      heat content and composition of impurities in our gas supply. We also conduct
      regular tests on the gas purchased in order to verify its quality.





**Insurance**





We
      currently do not carry any product liability or other similar insurance, nor
      do
      we have property insurance covering our plants, manufacturing equipment and
      office buildings expect compulsory insurance and fixed-sum insurance for cars
      and other vehicles. We plan to purchase property insurance to cover our
      manufacturing plants, equipment and office buildings in the near future when
      such insurance policies are available.




We
      maintain social insurance for our staff and employees in accordance with
      relevant requirements under PRC law.


22


**Government
      Regulations**





***Pricing
      Regulations*** ****





We
      purchase natural gas from natural gas wholesalers, which are state-owned
      enterprises and which must comply with PRC natural gas pricing regulations.
      The
      wholesale price of natural gas payable by distribution companies, such as
      Beijing Gas, to the suppliers of natural gas is comprised of three components,
      the wellhead price, the pipeline transportation tariff and the purification
      fee.
      The wellhead price is fixed by NDRC, and is currently set at $.12 per cubic
      meter with a 10% allowance for upward or downward adjustments for negotiation
      between suppliers and distribution companies. The pipeline transmission tariffs
      are determined by reference to the investment costs of the relevant long
      distance pipeline, depreciation, wear and tear and the distance of delivery.
      The
      purification fee is based on the actual purification costs of the suppliers.
      Both the pipeline transmission tariffs and the purification fee must also be
      approved by the NDRC.




**Pricing
      of Natural Gas - US$ per cubic meter**




**2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007**Wellhead
            
            $
            0.09
            
            $
            0.09
            
            $
            0.08
            
            $
            0.11
            
            $
            0.11Pipeline
            
            $
            0.09
            
            $
            0.09
            
            $
            0.09
            
            $
            0.09
            
            $
            0.09Purification
            
            $
            0.01
            
            $
            0.01
            
            $
            0.01
            
            $
            0.01
            
            $
            0.01Total
            
            $
            0.19
            
            $
            0.19
            
            $
            0.18
            
            $
            0.21
            
            $
            0.21




The
      price
      we charge our residential customers for natural gas is based on the wholesale
      price plus cost and a profit margin of 10-15% and must be approved by the local
      price bureau.





***Operational
      and Construction Permits***





In
      the
      PRC, companies in the gas distribution business must also obtain an operational
      permit from the local municipal government to begin operation. In addition,
      a
      construction permit must be obtained if such gas distribution company also
      engages in construction. In both cases, the local municipal government will
      review the qualifications and experience of the management and technical staff
      of the distribution company and consider whether the distribution company is
      capable of fulfilling the operational and construction standards.





As
      of
      February 18, 2008, Beijing Gas and most of our project companies and branch
      offices have the necessary operational permits. We are still in the process
      of
      getting natural gas distribution permits for six of our projects. We believe
      failure to obtain such permits in time for those projects will not have a
      materially adverse effect on our operations.





***Safety
      Regulations***





As
      a
      natural gas distributor, Beijing Gas is regulated by the Administrative Rules
      on
      the City Gas Safety jointly promulgated by the PRC Ministry of Construction,
      standards set by Standard Bureau and Fire Safety Bureau of PRC Ministry of
      Public Security effective in May 1991.  According to such rules, the
      manufacture, storage, transportation, operation, usage of city gas, design
      and
      construction of gas-related projects, and the manufacture of gas-related
      facilities shall be subject to relevant safety requirements and qualifications.
      Fuel service station standards are subject to regulation by the PRC’s Ministry
      of Construction, General Administration of Quality Supervision, and Bureau
      of
      Inspection and Quarantine. Required certificates are issued upon satisfactory
      inspection of service stations. In addition, there are various standards that
      must be met for filling stations, including handling and storage of gas, tanker
      handling, and compressor operation. These standards are regulated by local
      construction and gas operations regulating authorities. Inspections are carried
      out and certificates for the handling of dangerous agents are issued by relevant
      local authorities. As of December 31, 2007, most of our project companies have
      received such certificates. There are six project companies that are still
      in
      the process of obtaining such certificates. We believe failure to obtain such
      certificates in time for those projects will not have a materially adverse
      effect on our operations.


23





***Environmental
      Assessment***





Under
      China’s Environmental Regulations, each of our project location should obtain an
      environmental assessment report which asses the environmental impact of the
      operations of the project. The report must be approved by the relevant
      authorities. As of February 18, 2008, most of our project companies have
      obtained such reports. We are still in process of obtaining such reports for
      five project companies. We believe failure to obtain such reports in time for
      those projects will not have a materially adverse effect on our
      operations.





***Income
      Taxes***




Pursuant
      to the tax laws of PRC, general enterprises are subject to income tax at an
      effective rate of 33%. Beijing Gas is in the natural gas industry, whose
      development is encouraged by the government. However, PRC income tax regulations
      provide that any company operating in the natural gas industry enjoys a
      favorable tax rate. In addition, Beijing Gas has been approved as a high
      technology company and as such has been enjoying preferential income tax
      treatment under the PRC’s income tax policies. Under these policies, Beijing Gas
      was exempt from corporate income taxes for the first two years commencing from
      its first profitable year, and thereafter will be entitled to a 50% tax
      reduction for the succeeding three years. Our first profitable tax year was
      2003. Accordingly, our income is subject to a reduced tax rate of 7.5% from
      2005
      to 2007. Beginning in 2008, our income tax rate will be 7.5%. The subsidiaries
      of Beijing Gas are subject to the effective rate of 15% - 33%, but almost all
      income is earned by Beijing Gas.





***Foreign
      Currency Contro*** l




Under
      certain regulations in the form of public notices issued by the PRC State
      Administration of Foreign Exchange, or SAFE, our shareholders who are PRC
      resident entities or individuals are subject to certain registration
      requirements due to the status of GAS (BVI) and Sino Gas under Chinese law
      as
      offshore special purpose companies, or SPCs. These regulations would prohibit
      Beijing Gas from distributing dividends or profits to GAS (BVI) and/or Sino
      Gas
      as SPCs unless we comply with the registration requirements set forth by SAFE.
      As of the date hereof, Mr. Liu Yu Chuan, our President, Chief Executive Officer
      and Chairman of the Board, has completed the registration with the SAFE and
      has
      been issued a SAFE certificate in August 2006. We are in the process of
      determining whether there are additional shareholders who are subject to the
      SAFE regulations and whose compliance status will have a material effect on
      our ability to remit any of our profits out of the PRC as dividends or
      otherwise. **





**Employees**




As
      of
      March 31, 2008, we had approximately 367 full-time employees, including 61
      management personnel, 55 approximately 50 technicians, 30 engineers and 15
      research and development personnel. One employee holds a doctorate degree,
      3
      employees hold a master’s degree, and 102 employees hold a bachelor’s
      degree





As
      required by applicable Chinese law, we have entered into employment
      contracts with all of our employees. We have also entered into a confidentiality
      agreement with all of our employees under which such employees are prohibited
      from disclosing confidential information of the Company or using it for other
      purposes than the benefit of the Company. Directors, officers, mid-level
      managers and some key employees in sales and R&D are required to sign a
      non-compete agreement which prohibits them from competing with the Company
      while
      they are employees of the Company and not working for a competitor within one
      year of termination and working in the industry for two years after their
      employment with the Company is terminated.


24




Our
      employees in China participate in a state
      pension arrangement organized by Chinese municipal and provincial
      governments. We are required to contribute to the arrangement at the
      rate of 20% of the average monthly salary. In addition, we are required by
      Chinese law to cover employees in China with other types of social insurances.
      Our total contribution may amount to 30% of the average monthly salary. We
      have
      purchased social insurances for all of our employees. The social insurance
      we
      paid in 2006 and 2007 is shown below:




At and for the year ended
              December 31,2007
              (in USD)
            
            2006
              (in USD)Amount of social insurance
            
            
            233,113.58
            
            
            77,104.80





**Item
      2.****Description
      of Property**





**Description
      of Property**





We
      have
      offices at all operational locations. The facilities are added with each new
      project or operational location as part of the execution of the
      project.





All
      land
      in China is owned by the State. Individuals and companies are permitted to
      acquire rights to use land or land use rights for specific purposes. A “land use
      right” allows the holder the right to use the land for a specified long-term
      period of time and confers to the holder all the incidents of ownership of
      the
      land during that period. In the case of land used for industrial purposes,
      the
      land use rights are generally granted for a period of 50 years. This period
      may
      be renewed at the expiration of the initial and any subsequent terms. Granted
      land use rights are transferable and may be used as security for borrowings
      and
      other obligations. We hold land use rights for two parcels of land registered
      under their names, and lease land use rights from third parties for additional
      parcels of land that are used for its gas distribution projects. In addition,
      we
      lease office buildings and warehouse facilities for our business
      operations.





Set
      forth
      below is the detailed information regarding these land use rights registered
      under the names of Beijing Gas or its subsidiaries:




Registered owner of land use right
            
            Location & certificate of
              land use right
            
            Usage
            
            (approximate)
              square meters
            
            Date of
              Issuance or
              Grant
            
            Expiration
              DateBeijing Gas
            
            South side of
              Huang He
              Road, Cai
              Yuan Town,
              Wu Qiao
              County
              
              Wu Guo Yong
              (2003) Zi
              Di Chu No.
              208
            
            Other
              commercial
              use
            
            1,520
            
            November
              25, 2003
            
            November
              25, 2043Yu Tian Country Zhong Ran
              Wei Ye Gas Ltd.
            
            Between East
              side of Yu
              Zun West
              Road and
              South side of
              Guan Qu,
              Yu Tian
              County
              
              Yu Tian Guo
              Yong
              (2004) Zi Di
              No. 097
            
            Industrial
                use
            
            2,674.5
            
            June
                8,
              2004
            
            May
                21,
              2054


25





In
      addition to the land use rights described above, we have the right to use an
      aggregate of approximately 36,283 square meters for our operations either
      through grants or transfers of land use rights or lease arrangements. The rights
      range in duration from six to 20 years. The documentation of some of these
      land
      use rights have not yet been completed. We expect to complete the documentation
      for these land use rights in the near future.




As
      of
      December 31, 2007, we own 720 km of high-pressure underground pipeline all
      with
      a diameter greater than 110 millimeters. We also own and operate 33 natural
      gas
      stations with accompanying buildings, gas compression facilities and other
      equipment, including 22 cars, 19 trucks, 28 containers (3000 m 3 ), 6
      containers (450 m 3 ), and
      59 containers (300 m 3 ). We
      also lease two trucks from PetroChina.





We
      believe that all our properties and equipment have been adequately maintained,
      are generally in good condition, and are suitable and adequate for our
      business.




**Item
      3.**  **Legal
      Proceedings**





To
      our
      knowledge, there is no material litigation pending or threatened against
      us.





**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders**




None.


**PART
      II**





**Item
      5.**  **Market
      for Common Equity and Related Stockholder Matters**





Our
      common stock is quoted on the OTC Bulletin Board under the symbol SGAS.OB.
      There was no public trading activity in our shares during the past two fiscal
      years through September 7, 2006. Since our September 7, 2006 reverse merger
      with
      GAS Investment China Co., Ltd. (“Gas (BVI)”), there has been some minimal
      trading activity in our shares. The following table provides the high and low
      sales prices for our common stock as reported for the periods
      indicated.




Such
      prices are based on inter-dealer bid and asked prices, without markup, markdown,
      commissions, or adjustments and may not represent actual
      transactions.




CALENDAR QUARTER ENDED
            
            HIGH
              BID(S)
            
            LOW BID(S)September 30, 2006*
            
            $
            0.04
            
            $
            0.014December
                31, 2006
            
            $
            5.00
            
            $
            3.60March
                31, 2007
            
            $
            11.12
            
            $
            6.1June
                30, 2007
            
            $
            8.0
            
            $
            4.0September
                30, 2007
            
            $
            6.0
            
            $
            3.7December
                31, 2007
            
            $
            4.5
            
            $
            2.75First
                Quarter of 2008 (as of March 20, 2008)
            
            $
            4.0
            
            $
            2.02




*
      We
      completed our reverse merger with GAS Investment China Co., Ltd. (“Gas (BVI)”)
      on September 7, 2006.


26





As
      of
      March 28, 2008, there were 682 holders of record of our common
      stock.




To
      date,
      we have neither declared nor paid any cash dividends on shares of our common
      stock. We presently intend to retain earnings to finance the operation and
      expansion of our business and do not anticipate declaring cash dividends in
      the
      foreseeable future.




**Item
      6.**  **Management’s
      Discussion and Analysis or Plan of Operation**




The
      following discussion and analysis of our consolidated financial condition and
      results of operations should be read in conjunction with the consolidated
      financial statements and related notes of Beijing Gas appearing elsewhere in
      this annual report. This discussion and analysis contains forward-looking
      statements that involve risks, uncertainties and assumptions. Actual results
      may
      differ materially from those anticipated in these forward-looking statements
      as
      a result of certain factors, including, but not limited to, those set forth
      under "Risk Factors" in our registration statement filed with the SEC on January
      11, 2008.





**Overview**





We
      are
      engaged in the development of natural gas distribution systems and the
      distribution of natural gas to residential, and industrial customers in small-
      and medium-sized cities in China, through our indirectly-owned subsidiaries
      in
      the PRC, Beijing Gas and its subsidiaries.–





Beijing
      Gas is organized as a holding company with 26 subsidiaries, known as project
      companies, in four provinces, and four branches offices in Beijing, as shown
      on
      the corporate structure chart provided below. The project companies are the
      operating subsidiaries of Beijing Gas. Each project company operates as a local
      natural gas distributor in a city or county, known as an operational location,
      under an exclusive franchise agreement between Beijing Gas and the local
      government or entities in charge of gas utility, pursuant to which Beijing
      Gas
      formed the project company to operate the natural gas distribution project
      in
      the operational location. These exclusive franchise agreements last between
      20-30 years.





In
      addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang
      Ke
      Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint
      venture entity engaged in the business of development, licensing and sale of
      oil
      and gas technologies and equipment, and sale of self-produced
      products.




Through
      its subsidiaries, Beijing Gas is a natural gas distributor, principally engaging
      in the investment, operation and management of city gas pipeline infrastructure,
      in the distribution of natural gas to residential an industrial users, in the
      construction and operation of natural gas distribution networks, and in the
      development and application of natural gas related technologies. Beijing Gas
      and
      it subsidiaries own and operate 24 natural gas distribution systems serving
      approximately 69,860 residential and four commercial or industrial customers.
      Our facilities include approximately 700 km of pipeline and delivery networks
      with a designed daily capacity of approximately 70,000 cubic meters of gas.
      Currently, we are constructing an additional four natural gas distribution
      systems. We own and operate natural gas distribution systems primarily in Hebei,
      Jiangsu, Jilin, Anhui and Beijing.


27


Below
      is
      our corporate structure:











(1) *See
“Organizational History of Gas (BVI) and Beijing Gas” under “Description
      of Business” of this annual report regarding the subsidiaries of Beijing
      Gas.*





**Executive
      Summary**





**Economic
      & Industrial Trend**





We
      generate revenue from two sources: connection fees for constructing connections
      to our natural gas distribution network, and sales of natural gas. Our
      connection activities are closely related to the development of real estate
      industry in our targeting cities in China, given the fact that almost all of
      our
      connection fees are from new residential apartments. Natural gas facilities
      in
      new apartments are often required by local governments, who aim to promote
      the
      use of natural gas to improve local residents’ life quality.





We
      have
      experienced high growth of our connection activities since inception of our
      business, thanks to Chinese real estate boom in the past five years. We see
      no
      major factors that will change the trend of real estate industry in the coming
      year. Therefore we expect to continue to see growth of household connections,
      especially in small-to-medium sized cities where the real estate market is
      at an
      early developing stage.





If
      Chinese real estate market does slow down in the future, our connection business
      would be negatively affected as a result of fewer new household
      connections.





Our
      gas
      users are composed of industrial and residential users. Gas sales from
      residential users are much less affected by economic and industrial factors
      and
      would maintain stable growth in the future, due to the increasing pool of our
      residential customers. Gas sales from industrial users is subject to the
      operating performance of the end industrial user and development of new users.
      Gas sales to our industrial users have increased 70% during 2007, as we
      developed one new user and two of our existing users have expanded their
      production capacity. Our biggest industrial user, Hebei Zhong Gang Co. Ltd,
      is
      increasing production capacity, which is expected to increase our daily gas
      sales from 30,000 cubic meters to 45,000 cubic meters in 2008. As we develop
      into more cities, we expect to add one to two industrial users in the coming
      year.


28





**Material
      Opportunities**





The
      gas
      distribution market is quite fragmented in the small (population less than
      100,000)-to-medium (population between 100,000 to 300,000) sized cities. We
      have
      been in active talks with potential project targets. The size of the projects
      varies from small cities, like the ones we have, to medium-sized cities. For
      small city markets, many of them are still untapped or undeveloped. The
      development of these markets are generally considered major growth components
      of
      the company.





Regarding
      medium-sized or large cities, most of them have already been developed by large
      distributors or are still operated by state-owned companies. Acquisition
      opportunities exist for those still run by state-owned companies, as the central
      government encourages suppliers to turn them into privately-owned companies.
      The
      acquisition of these markets would have material impact on the company,
      increasing the company’s assets and revenues significantly. The company needs to
      raise money to fund these acquisitions.




**Material
      Challenges**





There
      are
      vast number of small-to-medium sized cities left undeveloped, but the
      competition is intense, as there are many small new players in the market
      attracted by the profitability and growth potential of the business. Meanwhile,
      from time to time, we are also facing competitions from stronger competitors,
      as
      large city markets are getting saturated and our competitors are beginning
      to
      expand into smaller cities.





We
      are
      facing limited opportunities in developing into first-tier cities in China,
      as
      most of them have already been taken by other large gas distributors, such
      as
      Xin’ao Gas Co. Ltd (largest in China) in the past decade.





Still,
      potential users in small and medium-sized cities need to be educated by the
      benefits of natural gas. It takes some time for them to get to know how natural
      gas can improve the quality of life. This is especially true for new markets,
      where there is no use of natural gas. Small cities tend to be more reluctant
      for
      use of new energies than large cities where residents depend more on coal,
      rather than natural gas.





China’s
      energy market is highly regulated by the government, with regard to purchase
      price and sale price of natural gas. Whenever there is an adjustment to purchase
      price by the government, gas distributors would increase the sale price
      correspondingly, subject to a public hearing and government approval. The
      increase of natural gas price in China is lagging behind that in the
      international markets, which has soared in the past year. The Chinese government
      has seldom adjusted natural gas and we can not rule out the possibilities of
      increase of natural gas price by the government in the future. Even though
      we
      can adjust the sale price accordingly after the increase of purchase price,
      passing the increase to end users. However, it would make natural gas more
      expensive, as compared to other alternative energies. Thus this increase of
      price will deter our business development.





**Risks
      in Short-Term and Long-Term**





In
      each
      of the cities we are developing and aiming to develop, the real estate market
      is
      the major factor that impacts us. Most of our residential customers are the
      new
      home buyers. If the real estate market turns downward, the demands for new
      homes
      would decrease, resulting in fewer natural gas connections, and thus negatively
      impacting our business.





To
      reduce
      the company’s heavy dependence on connection fees, the company is looking at
      opportunities to diversify its business by expanding into related areas, such
      as
      pipeline and gas station business. However, we do not expect to develop into
      those areas in large scale any time soon and it may take some time for those
      business to become our major business.


29





**RESULTS
      OF OPERATIONS**





***Year
      Ended Dec 31, 2007 Compared to Year Ended Dec 31,
      2006***





In
      the
      year ended December 31, 2007, our company achieved strong increases in financial
      and operational results. Our net revenues and gross profit were $20,267,756
      and
      $10,870,718, respectively, representing an increase of 86.44% and 66.13% from
      those in the previous year. Operating income in 2007 was $8,052,785,
      representing an increase of 53.97% from 2006. These results were largely
      attributed to the strategies the company has pursued:




1)
            Focus
                on small- to mid-sized cities each with a population of no more than
                one
                million, where there is little competition to obtain a franchise,
                and
                where our franchise grants us
                exclusivity.





2)
            Secure
                contracts for long-term supplies of natural gas from major gas suppliers
                in China at favorable prices and on favorable terms, which would
                support
                the continuous expansion of our customer
                base.





3)
            Finance
                our operations using a well-designed financing plan that will give
                us a
                favorable cost of capital.





4)
            Employ
                the best management with rich experience in the industry and improve
                operating efficiency and corporate
                governance.




For the 12 months ended
              December 31,2007
            
            2006
            
            ChangeUS$
            
            US$
            
            %Net
                Revenues
            
            
            20,267,756
            
            
            10,870,718
            
            
            86.44
            %Gross
                Profit
            
            
            10,768,004
            
            
            6,481,576
            
            
            66.13
            %Operating
                Income
            
            
            8,052,785
            
            
            5,229,948
            
            
            53.97
            %Net
                Income
            
            
            7,707,370
            
            
            5,073,289
            
            
            53.01
            %Gross
                Margin
            
            
            53.12
            %
            
            59.62
            %Net
                Margin
            
            
            38.03
            %
            
            47.52
            %




**Net
      Revenues**





We
      generate revenues from two sources: connection fees for constructing connections
      to our natural gas distribution network, and sales of natural gas.





Total
      net
      revenues for the twelve months ended Dec 31, 2007 were $20,267,756, compared
      to
      $10,870,718 for the same period in 2006, representing an increase of 86.44%.
      The
      increase was due to new customers’ connecting to our gas distribution network
      and new customers’ purchasing our natural gas. In 2007, we connected 39,306 new
      residential households to our gas distribution network, resulting in total
      connection fees of $12,973,148 and bringing the number of our total connected
      households to 87,537 as of the end of 2007. Gas sales during the same period
      amounted to 25.89 million cubic meters, or $7,294,608. In comparison, we
      connected 24,534 new residential households to our gas distribution network
      throughout 2006, resulting in total connection fees of $6,958,216. Gas sales
      during the period amounted to 13.83 million cubic meters, or
      $3,912,502.


For
                  the 12 months ended December 31,2007
              
              2006
              
              Change(In
                  $ million)
              
              US$
              
              %
              
              US$
              
              %
              
              %Net
                  Revenues
              
              
              20.27
              
              
              100
              %
              
              10.87
              
              
              100
              %
              
              86.44
              %Connection
                  Fees
              
              
              12.97
              
              
              64
              %
              
              6.96
              
              
              64
              %
              
              86.35
              %Gas
                  Sales
              
              
              7.30
              
              
              36
              %
              
              3.91
              
              
              36
              %
              
              86.7
              %


30





The
      financing we obtained in 2006 occurred later than expected and provided a
      smaller amount of funds than we had expected. The result of the reduced amount
      and later date of the financings was that we missed some of the opportunities
      we
      had originally targeted.





The
      high
      rate of net revenue growth in 2007 was due to our efforts to consolidate and
      enhance penetration of the existing markets, and our successful acquisitions
      of
      Beijing Chenguang Gas Co., Ltd. and Guannan Zhongyuan Natural Gas Co., Ltd.,
      which were adequately funded by our financings closed in late 2006. We expect
      this trend to continue as we are actively looking for acquisition targets and
      plan on raising additional funds. This rate of growth may not be sustained
      in
      the future if we are not able to raise adequate funds for the
      acquisitions.





We
      are
      considering several potential acquisition targets, which would substantially
      contribute to our revenues and net income if successfully acquired. We are
      very
      close to reach an agreement with a medium-sized city and we are in talks with
      two to three other small-sized city projects. There are various means for us
      to
      raise money for potential acquisition, including equity financing, debt
      financing, domestic bank loans. We have signed term sheet with one debt
      financing investor raising approximately $20 million for the acquisition of
      the
      potential target projects.  The definitive agreements are expected to
      be signed in the second quarter of 2008. Meanwhile, we are engaged with domestic
      banks targeting on borrowing approximately $20 million.





The
      high
      percentage of connection fees as compared to gas sales was due to the fact
      that
      we have started many new projects and we were able to collect connection fees
      upfront from new customers. We expect the ratio of connection fees to the total
      to continue for some time because we are in the growth stage and will develop
      several new projects per year. As the projects are fully developed and the
      opportunities for new projects decrease, the percentage of gas sales relative
      to
      the total revenue will increase and the percentage of connection fees relative
      to the total revenues will decrease.





To
      reduce
      the company’s heavy dependence on connection fees, the company is also looking
      at opportunities to diversify its business by expanding into related areas,
      like
      pipeline and gas fueling stations. However, we do not expect to develop into
      those areas in large scale any time soon and it may take some time for those
      businesses to become one major driver of the natural gas industry.





Connection
      Fees





Connection
      fees in 2007 were $12.97 million, representing an increase of 86.35% over the
      year 2006, accounting for 64% of the total net revenue compared with
      approximately 64% for the same period in 2006. With regard to the source of
      connection fees, $11.26 million, or 87% of total connection fees, came from
      the
      development of new residential users. We connected 39,306 residential users
      in
      2007, an increase of approximately 79.87% from 2006. Industrial users
      contributed a relatively small $1.72 million, or 13%, of our total connection
      fees in 2007, an increase of 145.71% from prior one-year period.





For
                the 12 months ended December 31,(in
                US$ millions)
            
            2007
            
            2006
            
            ChangeUS$
            
            %
            
            US$
            
            %
            
            %Connection
                Fees
            
            
            12.97
            
            
            100
            %
            
            6.96
            
            
            100
            %
            
            86.35
            %Residential
                Users
            
            
            11.26
            
            
            87
            %
            
            6.26
            
            
            90
            %
            
            79.87
            %Industrial
                Users
            
            
            1.72
            
            
            13
            %
            
            0.70
            
            
            10
            %
            
            145.71
            %




Such
      substantial increase was primarily attributable to the following two
      aspects.


31





First
      of
      all, we tried our best to develop more residential customers in those cities
      of
      which we have obtained franchise of natural gas distribution systems. Our
      invested projects in the twelve months ended Dec 31, 2007 connected 32,479
      new
      residential households, resulting in approximately $9.3 million to our total
      connection fees. In comparison, during the same period of 2006, we connected
      24,534 new residential households to our gas distribution network, resulting
      in
      total connection fees of $6.5 million.





Secondly,
      Quality projects merger was judged to be another important factor in our good
      performance. Beijing Chenguang Gas Co., Ltd. (“Beijing Chenguang”), acquired in
      January 2007, connected 4,256 new residential households in the twelve months
      ended Dec 31, 2007, resulting in approximately $1.3 million to our total
      connection fees. Guannan Weiye Gas Co., Ltd. (“Guannan Weiye”), acquired in
      July 2007, connected 2,571 new residential households in the twelve months
      ended
      Dec 31, 2007, resulting in approximately $0.68 million to our total connection
      fees.





The
      table
      below is a breakdown of our top four customers by connection fees:





Customers
            
            Connected
              Household Users
              (thousand)
              (thousand)
            
            Connection Fees:
              ($ million)
            
            Percentage of
              Connection Fees
              (%)Shanghai
                Datun Energy Holdings
            
            
            8.7
            
            
            2.76
            
            
            38.23
            %Huabei
                Petrol Bureau
            
            
            2.5
            
            
            0.59
            
            
            8.17
            %Jinshi
                Real Estate Co.
            
            
            1.3
            
            
            0.50
            
            
            6.93
            %Jiangsu
                Hongze Lake Farm
            
            
            1.4
            
            
            0.40
            
            
            5.54
            %





At
      present, we have several projects under negotiation that show great growth
      potential, and we have signed Letter of Intent for three projects. It is
      anticipated that the completion of the acquisition will bring the company
      altogether around 19,000 new residential customers in the coming year, which
      constitutes the new major sources of connection fees.





Gas
      Sales





In
      terms
      of volume, we sold 25.89 million cubic meters of natural gas in 2007, compared
      with 13.84 million cubic meters in 2006. In terms of value, gas sales were
      $7.29
      million, accounting for 36% of total net revenue in 2007, representing nearly
      an
      increase of 90% over the year 2006. Gas sales to residential users increased
      93.26%, from $0.89 million in 2006 to $1.72 million in 2007. Gas sales to
      industrial users increased 32.09%, from $2.15 million in 2006 to $2.84 million
      in 2007. Gas sales to commercial users increased 213.95%, from $0.86 million
      in
      2006 to $2.73 million in 2007.


For
                  the 12 months ended December 31,2007
              
              2006
              
              Change($
                  million)
              
              US$
              
              %
              
              US$
              
              %
              
              %Gas
                  Sales
              
              
              7.29
              
              
              100
              %
              
              3.91
              
              
              100
              %
              
              86.44
              %Residential
                  Users
              
              
              1.72
              
              
              23
              %
              
              0.89
              
              
              23
              %
              
              93.26
              %Industrial
                  Users
              
              
              2.84
              
              
              39
              %
              
              2.15
              
              
              55
              %
              
              32.09
              %Commercial
                  Users
              
              
              2.73
              
              
              38
              %
              
              0.86
              
              
              22
              %
              
              213.95
              %




Such
      substantial increase was primarily attributable to the following two
      aspects.





First
      of
      all, our invested projects maintained steady and rapid development. During
      the
      twelve months ended Dec 31, 2007, 15.74 million cubic meters of gas were sold,
      resulting in approximately $4.53 million, 62.17% of our total gas sales. In
      comparison, during the same period of last year, 13.84 million cubic meters
      of
      gas were sold, resulting in approximately $3.91 million.


32





Secondly,
      Quality projects merger was judged to be another important factor in our good
      performance. Beijing Chenguang Gas Co., Ltd. (“Beijing Chenguang”), acquired in
      January 2007, sold 10.15 million cubic meters of gas during the twelve months
      ended Dec 31, 2007, resulting in approximately $2.76 million, 37.83% of our
      total gas sales.





The
      table
      below is a breakdown of our major industrial customers for gas consumption
      in
      2007.





**Industrial
                  Customers**
              
              Gas Usage
                (million
                cubic
                meters)
              
              Gas Usage
                ($ million)
              
              Percentage
                of Gas Sales
                (%)Hebei Zhonggang Steel Co., Ltd.
              
              
              7.35
              
              
              2.21
              
              
              30
              %Tangshan
                  Changsheng Ceramic Factory
              
              
              0.97
              
              
              0.29
              
              
              4
              %The
                  First Machine Factory of Huabei Petrol Bureau
              
              
              0.77
              
              
              0.21
              
              
              3
              %Elite
                  (Langfang) Textile Corporation
              
              
              0.22
              
              
              0.06
              
              
              1
              %Hebei
                  Jihengyuan Group Ltd.
              
              
              0.15
              
              
              0.05
              
              
              1
              %





Gas
      sales
      of $2.21 million were contributed by a single industrial project, Hebei
      Zhonggang Steel Co., Ltd. (“Hebei Zhonggang”), which started to use gas at the
      beginning of 2006. The gas consumption of Hebei Zhonggang has increased to
      7.35
      million cubic meters in 2007 from 5.24 million cubic meters in 2006. Throughout
      2006, daily gas consumption by Hebei Zhonggang was roughly 15,000 cubic meters.
      In 2007, daily gas consumption by Hebei Zhonggang has increased to roughly
      20,000 cubic meters.





Since
      the
      profit margin is only 2% for gas sales to commercial customers, much lower
      than
      the approximately 15% profit margin for sales to industrial and residential
      users, our company is going to refine the gas sales structure in the coming
      year. We will endeavor to include more valuable industrial customers and
      intentionally reduce sales to commercial customers, which made up a larger
      percentage of total gas sales in 2007, especially under the circumstances of
      insufficient gas supply.





It
      is
      anticipated that the acquisition of the medium-sized city project with which
      we
      are in talks and have signed the Letter of Intent will bring our company
      additional 40 million cubic meters of gas usage in 2008.





**Cost
      of Revenues**





Cost
      of
      revenues in fiscal year 2007, which includes cost of connection and cost of
      gas
      sales was $9.50 million, an increase of $5.11 million, or 116.4%, from $4.39
      million in fiscal year 2006.


For
                    the 12 months ended December 31,2007
                
                2006
                
                Change($
                    million)
                
                US$
                
                %
                
                US$
                
                %
                
                %Cost
                    of Revenues
                
                
                9.50
                
                
                100
                %
                
                4.39
                
                
                100
                %
                
                116.4
                %Connection
                    Cost
                
                
                3.13
                
                
                33
                %
                
                1.44
                
                
                33
                %
                
                117.4
                %Gas
                    Cost
                
                
                6.37
                
                
                67
                %
                
                2.95
                
                
                67
                %
                
                115.9
                %





Cost
      of Connection




Our
      cost
      of connection during the twelve months ended Dec 31, 2007 was $3.13 million,
      or
      33% of total cost of revenues. By comparison, the cost of connection during
      the
      same period of 2006 was $1.44 million, or 33% of total cost of
      revenue.





Cost
      of
      connection increased around 117.4% from the same period in 2006, due to both
      the
      expansion of our operations and the increased cost of gas station maintenance
      resulting from the development of our gas stations.





Cost
      of
      connection includes depreciation of major pipelines, the cost of courtyard
      pipelines, valves, gas meters, and installation and maintenance
      fees.


33


Considering
      the city's overall planning and the long-term interests of our company, the
      capacity of the gas pipeline network we designed to distribute gas for a city
      usually greatly exceeded the number of households we served at the very
      beginning, which makes the cost of connection, specifically the depreciation
      of
      fixed assets and maintenance cost greatly increase. However, with connection
      of
      more households to the gas pipeline, the average cost to each household will
      be
      gradually reduced.





Cost
      of Gas Sales




The
      cost
      of natural gas sales includes the purchase and transportation of natural gas
      and
      depreciation of delivery trucks. The cost of gas sales increased 115.9% to
      $6.37
      million during the twelve months ended Dec 31, 2007 from the same period in
      2006, when it was $2.95 million. This increase, which outpaced the 86.44%
      increase in sales of natural gas during the same interval, is largely due to
      the
      addition of gas delivery trucks acquired for approximately CNY 12 million ($1.64
      million), the depreciation of which added to our cost of natural gas sales.
      We
      believe that the impact of that depreciation will be gradually reduced as our
      business and customer base grow.





Connection
      fees has a much higher gross margin than Gas Sales. That is why there is a
      larger percentage of Gas Cost in total Costs of Revenues, 67% for the year
      2007,
      than Connection Cost, 33%.





For
      the
      twelve months ended Dec 31, 2007, we have purchased a total of 16.81 million
      cubic meters of natural gas, about 66% of which were purchased from North China
      Oil Field Fourth Oil Extraction Plant of Petro China.




The
      purchase price that gas distributors pay for natural gas, which is set by the
      PRC government, is approximately CNY 1.6 to 1.9 ($0.22 to $0.26) per cubic
      meter. We signed a ten-year gas supply agreement in 2003. It is tentatively
      prescribed that every year Petro China supplied a total of 10 million cubic
      meters of natural gas at CNY 1.55 ($0.212) per cubic meter between April 1
      and
      October 31 and CNY 1.65 ($0.226) per cubic meter during the rest of the year.
      At
      the beginning of each year in the ten-year contract period, we negotiate with
      Petro China on the price and supply amount according to market
      conditions.





Langfang
      Development Zone Wei Ye Hazardous Goods Transportation Co. Ltd, one of our
      subsidiaries, is responsible for our gas transportation, and transportation
      cost
      per cubic meter is relatively stable at CNY 0.55 ($0.075) per cubic meter.
      Management believes that this transportation cost per cubic meter is likely
      to
      remain constant in spite of the increased depreciation costs from the newly
      purchased vehicles described above, because the vehicles will allow delivery
      of
      additional natural gas to customers in sufficient numbers to offset those
      costs.





The
      table
      below details our major gas suppliers in 2007:


Gas
                  Supplier
              
              Gas Purchase
                (million cubic
                meters)
              
              Gas Purchase
                ($ million)North China Oil Field Fourth Oil
                  Extraction Plant of Petro China
              
              
              11.17
              
              
              2.05Beijing
                  Gas Group Co., Ltd.
              
              
              3.12
              
              
              0.75Tianjin
                  Dagang Oilfield Transportation Co., Ltd.
              
              
              1.04
              
              
              0.27Henan
                  Zhong Yuan Green Energy High-Tech Co., Ltd.
              
              
              0.71
              
              
              0.24Hebei
                  Natural Gas Co. Ltd
              
              
              0.77
              
              
              0.17


34





**Gross
      Profit**


For
                  the 12 months ended December 31,2007
              
              2006
              
              Change($
                  million)
              
              US$
              
              %
              
              US$
              
              %
              
              %Gross
                  Profit
              
              
              10.77
              
              
              100
              %
              
              6.48
              
              
              100
              %
              
              66.13
              %Connection
              
              
              9.85
              
              
              91.4
              %
              
              5.51
              
              
              85
              %
              
              78.77
              %Gas
              
              
              0.92
              
              
              8.6
              %
              
              0.97
              
              
              15
              %
              
              -5.157
              %





During
      the twelve months ended Dec 31, 2007, gross profit was $10.77 million, an
      increase of approximately 66% from the same period of 2006. Gross profit from
      connection fees is $9.85 million for the first twelve months of 2007, accounting
      for 91.4% of total gross profit. In comparison, gross profit from connection
      fees was $5.51 million for the twelve months of 2006, accounting for 85% of
      total gross profit. Gross profit from gas sales was $0.92 million, accounting
      for 8.6% of total gross profit, compared to $0.97, 15% of total gross profit
      million in the same period of 2006.




Gross
      margin during the twelve months ended December 31, 2007 is 53.13%, compared
      to
      59.62% during the same period in 2006.





Gross
      margin for connection fees for year 2007 was 75.91%, compared to 79.17% in
      2006.
      The decrease of connection gross margin are mainly because we built gas
      distribution infrastructure which can be used for 25-30 years by the total
      potential residential households in our operating cities and now only a small
      proportion of residential households have been connected. As a result, the
      depreciation under the cost of connection is relatively higher. As we develop
      more households in the cities, the margin will be improved.





Gross
      margin for sales of natural gas was 12.62% in 2007, compared with 24.81% during
      the same period of 2006, due to the relatively higher depreciation for delivery
      trucks described above.





**Selling
      and Marketing Expenses**





Our
      selling and marketing expenses in the twelve months ended Dec 31, 2007 were
      $609
      thousand and approximately 3% of our net revenues, compared with $95.8 thousand,
      or 1 % of net revenues in the same period of 2006.





In
      2007,
      we acquired Beijing Chenguang which owns four subsidiaries and Guannan Weiye,
      and we incorporated five new subsidiaries. The expansion of our company led
      to
      greatly increased staff salary, social insurance cost, travel and communications
      cost, and depreciation of fixed assets, which are attributable to increase
      of
      selling and marketing expenses.





**General
      and Administrative Expenses**





General
      and administrative expenses were $2.11 million for the twelve months ended
      Dec
      31, 2007, which was 82.23% higher than $1.16 million for the same period last
      year.





The
      new
      subsidiaries will definitely bring income of long-term. Nevertheless, the
      expenses from business operation occur simultaneously. Therefore, a good expense
      to revenue ratio was unable to be achieved currently. In 2007, our expense
      to
      revenue ratio is 10.39%, representing a slight decline compared to 10.63% in
      2006 owing to our improvement in management.





The
      increase was largely due to the increase in the number of operating subsidiaries
      we own, which led to increases in salary, social insurance, traveling expenses
      and other expenses. The increase was also due in part to largely increased
      depreciation relating to new assets described above. We believe an upward trend
      in general and administrative expenses is inevitable in 2008.


35


**Operating
      Income**





The
      operating income in 2007 was $8.05 million, representing an increase of 53.89%,
      compared to the operating income of $5.23 million in 2006.





Our
      company enjoyed a satisfying performance due to a prominent increase in revenues
      and a faster revenues growth than general and administrative expenses
      growth.





**Income
      tax**




Income
      tax was $0.53 million in 2007, compared to $0.42 million in 2006.





For
      2007,
      the income tax rate applicable to Beijing Gas, the main subsidiary of Sino
      Gas
      in China, is 7.5%. Beijing Gas is classified as a foreign high-tech enterprise
      by the tax regulatory authority, and therefore has enjoyed a favorable tax
      rate
      for the past five years, with an income tax rate of zero in 2004 and 7.5% from
      2005 to 2007. The income tax rate is expected to be 15%, the standard rate
      for
      foreign high-tech enterprises.




The
      income tax rate of our subsidiaries is 18-33%, except for Beijing Chenguang
      and
      Beijing Gas. Beijing Chenguang has also been classified as a foreign high-tech
      enterprise and is subject to the favorable income tax rate of 7.5% from 2006
      to
      2008.





**Net
      Income**





Net
      income in the twelve months ended Dec 31, 2007 was $7.71 million, representing
      an increase of 52.07% from $5.07 million in the same period in 2006. The
      increase can be attributed to the continued growth of our existing markets
      and
      the acquisitions we have made.





Net
      income margin is 38%, compared with 46.64% for the same period last year. The
      decrease was mainly due to our substantial increase of cost and
      expenses.





**Liquidity
      and Capital Resources**




Cash
      and
      cash equivalents were $10.92 million as of December 31, 2007, an increase of
      $7.28 million over $3.64 million of cash and cash equivalents one year earlier.
      The major source of cash was from the Company’s financing and operating
      activities.





We
      have
      the following major financing activities during the period of 2007: we completed
      equity financing of $18.77 million in September, 2007 and the net proceeds
      of
      the financing for the company is $13.79 million; in May we received $3 million
      in gross proceeds and $2.3 million in net proceeds from the exercise of warrants
      by investors; Beijing Gas, the main subsidiary of Sino Gas in China, took out
      a
      one year loan in the amount of CNY 20 million (approximately $2.7 million),
      accruing interest at an adjustable rate (currently at 6.0225% per year), with
      interest payable quarterly, from Industrial Bank, Beijing Branch; during the
      quarter ended March 30, 2007, we repaid an CNY 20 million (approximately $2.7
      million) short-term loan from Shenzhen Development Bank.





**Cash
      Flows**





Cash
      flows from operating activities during the twelve months ended Dec 31, 2007
      is
      $14.30 million, an increase of $12.14 million from $2.16 million in 2006, which
      is owing to our effective management of accounts receivable.





Cash
      flows from investing activities during the twelve months ended Dec 31, 2007
      is
      $25.16 million, an increase of $16.02 million from $9.14 million in 2006. We
      used the funds raised for acquisitions and project developments. During the
      year
      of 2007, we have paid out about CNY 70.81 million (approximately $9.6 million)
      for investment and acquisition.


36


The
      table
      below is a breakdown of Cash Outflow from Investing Activities in
      2007:





Beijing
                Chenguang Gas Ltd.
            
            $
            3,413,328Wuhe
                Weiye Gas Co., Ltd.
            
            $
            393,846Gucheng
                Weiye Gas Co., Ltd.
            
            $
            393,846Nangong
                Weiye Gas Co., Ltd.
            
            $
            393,846Sixian
                Weiye Gas Co., Ltd.
            
            $
            393,846Baishan
                Wiye Gas Co., Ltd.
            
            $
            1,969,228Yuxian
                Jinli Gas Co., Ltd.
            
            $
            325,579Guannan
                Weiye Gas Co., Ltd.
            
            $
            918,973Xinji
                Zhongchen Gas Co., Ltd.
            
            $
            385,969Shijiazhuang
                Chenguang Gas Co., Ltd.
            
            $
            257,312Luquan
                Chenguang Gas Co., Ltd.
            
            $
            257,312Cheng’an
                Chenguang Gas Co., Ltd.
            
            $
            192,984





Cash
      flows from financing activities during the twelve months ended Dec 31, 2007
      is
      $17.08 million, an increase of $7.22 million from $9.86 million in
      2006.





Natural
      gas distribution is a typical capital-intensive industry, which requires a
      large
      amount of capital for the construction of pipelines and gas stations, purchase
      of transportation vehicles etc. while the investment would be got back in the
      following year with increasing new household connections. Under the organic
      growth model (growth by the Company without outside funding), the Company can
      develop new city projects by using the money generated from existing cities.
      The
      Company would be constrained by inadequate capital when developing into bigger
      cities or making Merger &Acquisition activities, under which situation the
      company needs to raise money to finance its business
      expansion.





**Accounts
      Receivable**





Accounts
      receivable as of December 31, 2007 were $7.32 million, representing a decrease
      of $0.79 million from $6.53 million as of December 31, 2006. Accounts receivable
      accounted for 36.09% of net revenues, compared to 60.11% in 2006. The
      considerable decrease was owing to the fact that we attach great importance
      to
      the management and control of accounts receivable.





Our
      account receivable is expected to gradually decrease during the first six months
      of 2008 due to our seasonal business cycle, in which many accounts receivable
      are recorded upon completion of construction projects in the fourth quarter,
      and
      are collected in the second quarter of the following year. The term of most
      of
      our accounts receivable is one year. As of the end of the second quarter of
      2007, accounts receivable dated from 2006 had been mostly collected, and the
      remainder were primarily warranty payments. A warranty payment is the final
      payment that a customer makes for a construction project. It consists of the
      final 10% of the total project cost, and it becomes payable one year after
      construction has been completed, provided that no significant problems with
      the
      construction have arisen during the year.




The
      table
      below is a breakdown of our 10 largest accounts receivable as of December 31,
      2007.


37





Baishan
                Jiehe Development & Construction Co., Ltd.
            
            $
            200,844Shuqian
                Mingwei Development & Construction Co., Ltd.
            
            
            241,998Peixian
                Jiannan Real Estate Development Co., Ltd.
            
            
            313,367Sihong
                Jinwan Construction Co., Ltd.
            
            
            316,101Xiuzhou
                Shenyuan Real Estate Development Co., Ltd.
            
            
            337,038Guannan
                Construction Co., Ltd.
            
            
            345,360Lianyuangan
                Baoli Development Co., Ltd.
            
            
            357,665Jianshu
                Province Farms
            
            
            421,405Huabei
                Oil Management & Machine co., Ltd.
            
            
            553,365Hebei
                Zhonggang Steel Co., Ltd.
            
            
            592,135$
            3,681,282





**Notes
      Receivable**




Notes
      receivable of $0.83 million as of December 31, 2007 is the Note issued by Hebei
      Zhonggang for its use of gas. The Note will be duly honored by
      bank.




**Inventory**




Inventory
      of $0.21 million as of December 31, 2007 was comprised of the spare parts of
      Maintenance equipment stored for Langfang Development Zone Wei Ye Hazardous
      Goods Transportation Co. Ltd., steel gas storage tanks, and natural
      gas.





**Prepayments**




Prepayments
      of $0.32 million as of December 31, 2007 were consist entirely of the
      prepayments for gas purchasing in accordance with the purchase and sale contract
      we signed with the gas suppliers.





**Fixed
      Assets**




Fixed
      Assets as of December 31, 2007 was $26.23 million, an increase of $10.94 million
      from $15.29 million in 2006. The table below is a breakdown of our fixed assets
      at cost:





2007
            
            2006At
                CostGas
                Pipelines
            
            $
            18,885,734
            
            $
            8,255,231Motor
                Vehicles
            
            
            4,874,685
            
            
            2,204,621Machinery
                & Equipment
            
            
            885,997
            
            
            273,943Buildings
            
            
            1,405,638
            
            
            89,799Leasehold
                Improvements
            
            
            68,942
            
            
            47,543Office
                Equipment
            
            
            105,336
            
            
            67,774Less
                Accumulated depreciation
            
            
            (1,653,771
            )
            
            (330,381
            )$
            24,572,565
            
            $
            10,608,530




**Other
      Payables**





Other
      payables as of December 31, 2007 were $10.4 million, an increase of $8.6 million
      from the end of 2006. This increase is due to the fact that the former operator
      of Baishan city gas distribution system we acquired in July transferred its
      fixed assets valued at around $3.85 million to our company.




**Off-balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements.


38


**Item
      7.**  **Financial
      Statements**




Our
      financial statements begins on page F-1 of this annual report.




**Item
      8.**  **Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure**





On
      August
      30, 2006, our Board of Directors approved the dismissal of Robison, Hill &
Co. (“Robison") as our registered independent certified public accounting firm
      effective on September 7, 2006. Concurrent with this action, our board of
      directors appointed Samuel H. Wong & Co., LLP as our new registered
      independent certified public accounting firm.





The
      audit
      opinions of Robison, Hill & Co. on the financial statements for the fiscal
      years ended December 31, 2004 and 2005 did not contain an adverse opinion,
      a
      disclaimer of opinion, nor was it qualified or modified as to uncertainty,
      audit
      scope or accounting principles, except that the report of Robison, Hill &
Co. for the fiscal years ended December 31, 2004 and 2005 indicated conditions
      which raised substantial doubt about our ability to continue as a going
      concern.





Samuel
      H.
      Wong & Co., LLP have audited our consolidated financial statements for the
      years ended December 31, 2007, 2006 and 2005. The audit opinions of Samuel
      H. Wong & Co., LLP did not contain an adverse opinion, a disclaimer of
      opinion, nor was it qualified or modified as to uncertainty, audit scope or
      accounting principles.




**Item
      8A.**  **Controls
      and Procedures**




**Management’s
      Report of Internal Control over Financial Reporting**


Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
      of
      the Exchange Act and have designed internal control over financial reporting
      or
      caused internal control over financial reporting to be designed under its
      supervision in order to provide reasonable assurance regarding the reliability
      of financial reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting principles, as
      applicable. Due to its inherent limitations, internal control over financial
      reporting may not prevent or detect material misstatements. In addition,
      projections of any evaluation of effectiveness to future periods are subject
      to
      the risk that controls may become inadequate because of changes in conditions,
      or that the degree of compliance with the policies or procedures may
      deteriorate.





Under
      the
      supervision of and with the participation of our Chief Executive Officer and
      our
      Chief Financial Officer, our management conducted its evaluation of the
      effectiveness of our Company’s internal control over financial reporting as of
      December 31, 2007 using the criteria in the *Internal Control-Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Based on that evaluation, our management concluded that, as of December 31,
      2007, our Company’s internal control over financial reporting was not effective
      due to the material weaknesses described below.





(1)
      The
      Company has not yet established a comprehensive Code of Conduct and Ethics
      (the
“Code”) which is applicable to all Company directors, officers and employees
      until beginning of March 2008.





(2)
      Our
      Internal Audit Department has not taken an active role in the conduct of its
      activities due to insufficient resources. The annual plan, budget, and specific
      procedures to perform the internal audit function has not been developed, and
      the anti-fraud audit plan has not been developed either.





(3)
      Our
      Audit Committee was not comprised of sufficient independent directors who are
      "independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under
      the
      Exchange Act. Our Audit Committee did not appoint a member who qualifies as
      an
      "audit committee financial expert" as defined in Item 401(e) of Regulation
      S-B.
      Our written Audit Committee Charter was not submitted to the Boards for
      approval.


39


(4)
      Our
      Company did not formulate a Related Party Transactions Policy and develop a
      master list of all Related Parties.





This
      annual report does not include an attestation report of the company's registered
      public accounting firm regarding internal control over financial reporting.
      Management's report was not subject to attestation by the company's registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the company to provide only management's report
      in this annual report.





**Management’s
      Plan for Remediation of Material Weaknesses**


In
      light
      of the conclusion that our Company’s internal control over financial reporting
      was not effective, our management has worked, and will continue to work, to
      address these weaknesses in our internal control over financial reporting.
      Implementations of certain remedial measures include the following:





(1)
      We
      are going to issue the Code, and arrange respective training to all the
      employees before April 30, 2008. Training which includes the content of the
      Code
      will be provided to new employees at the time of hiring. All the employees
      will
      be required to sign an affidavit acknowledging that the employee has read and
      will intend to comply with the Code;





(2)
      The
      management is committed to develop a comprehensive and risk-based internal
      audit
      function within the Company. With the limited human capital supplies in the
      market, we have engaged a third party professional to assist the management
      in
      establishing the internal control system. At the same time, we have enhanced
      our
      efforts of recruitment and interviews are undergoing. We expect that an internal
      audit department will be set up before May 31, 2008. With the continuous
      assistance from the third party professional, the roles and responsibilities
      of
      the internal audit department will be formulated and a risk-based internal
      audit
      plan will be developed and approved by the Audit Committee within a month after
      the set up.





(3)
      The
      Board of Directors has appointed Mr. Zhang Xin Min on March 10, 2008, Mr. Zhang
      serves as a financial expert of Audit Committee and will provide
      oversight/monitoring over our financial reporting mechanism.





(4).
      Compensation Committee Charter, Audit Committee Charter and Related Party
      Transactions Policy have been drafted in February, 2008, and will be approved
      by
      the Board of Directors and become effective before second quarter.





**Changes
      in Internal Control over Financial Reporting**




Other
      than the remediation measures described above, during the year ended December
      31, 2007, there was no change in our internal controls over financial reporting
      that has materially affected, or that is reasonably likely to materially affect,
      our internal control over financial reporting.





**Item
      8B.**  **Other
      Information**





None.





**Part
      III**





**Item
      9.**  **Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange Act**


40





**Directors
      and Executive Officers**




Directors
                and Executive
              Officers
            
            Position/Title
            
            AgeYuchuan
                LIU
            
            President
                & Chief Executive Officer, director and Chairman of the
                Board
            
            44Zhicheng
                ZHOU
            
            Chief
                Operating Officer/Director (since Mar. 14, 08)
            
            44Zhimin
                ZHONG
            
            Marketing
                Director
            
            53Shukui
                BIAN
            
            Vice
                President & Chief Engineer
            
            44Yong
                ZHANG
            
            Chief
                Financial Officer
            
            34Guowei
                CHEN
            
            Director
            
            52Quandong
                SUN
            
            Director
            
            42Xinmin
                ZHANG
            
            Director
            
            53John
                D. KUHNS
            
            Director
                (resigned effective Mar. 8, 08)
            
            57Fang
                CHEN
            
            Director
                (resigned effective Mar. 6, 08)
            
            35




here
      are
      no family relationships among our directors or executive officers.





All
      our
      directors hold office until the next annual meeting of our shareholders, and
      until their successors have been qualified after being elected or appointed.
      Officers serve at the discretion of our board of directors.





Set
      forth
      below is the biographical information about our directors and executive
      officers:




***Mr.
      Yuchuan Liu*** Mr.
      Liu was appointed our Chairman, Chief Executive Officer and President on
      September 7, 2006. Mr. Liu graduated from North Industrial University, Beijing,
      PRC with a B.S. degree in electrical engineering. Mr. Liu has been a licensed
      Senior Engineer in the PRC since 1997. Mr. Liu was the Chairman of the board
      of
      directors and General Manager of Beijing Zhong Ran Wei Ye Gas Co., Ltd. between
      2003-2006 and he was the Chairman of the Board of Beijing Xiang Ke Jia Hua
      Petroleum and Natural Gas Co., Ltd. between 2000 and 2003. Prior to that, Mr.
      Liu served as CEO of Lang Fang Zhong Gong Petroleum and Natural Gas Technology
      Co., Ltd. from 1997 to 1999. Prior to that, Mr. Liu served as the Chief of
      Research and Development Department of Petro China from 1983 to
      1997.




***Mr.
      Zhicheng Zhou*** Mr. Zhou
      was appointed our Chief Operating Officer on October 19, 2006. Previously,
      Mr.
      Zhou served as the director and General Manager of Beijing Chenguang Gas Co.,
      Ltd. from late 2002 to 2007. Prior to that, Mr. Zhou served as the Associate
      General Manager and later General Manager of Beijing Zhong Ran Xiang Ke
      Petroleum and Oil Technology Co., Ltd. between 2001 and 2002.





***Mr.
      Zhimin Zhong*** ** Mr.
      Zhong
      was appointed our Marketing Director on September 7, 2006. ** Mr.
      Zhong
      graduated from Nanjing University with a B.S. in Philosophy. Mr. Zhong was
      the
      Marketing Director for Beijing Zhong Ran Wei Ye Gas Co., Ltd., between
      2004-2006. Mr. Zhong was Vice President of Shen Zhen Guo Qi Real Estate Co.
      Ltd
      from 1995 to 2004. Prior to that, Mr. Zhong served as a government official
      in
      several cities in Jiang Xi Province between 1978 and 1995.




***Mr.
      Shukui Bian*** ** Mr.
      Bian
      was appointed our Vice President and Chief Engineer on September 7, 2006. Mr.
      Bian graduated from Daqing Petroleum Institute with a B.S. and Petroleum
      University with a M.S. He served as Vice President of Beijing Zhong Ran Xiang
      Ke
      Petroleum and Oil Technology Co., Ltd. between 2000 and 2007. Prior to that,
      Mr.
      Bian had been with North China Oilfield The First Refinery Factory for fourteen
      years. Mr. Bian was one of the industry experts that drafted The National
      Standard of Natural Gas Usage in Cities in China.




***Mr.
      Yong Zhang*** On
      April
      25, 2008, Mr. Yong Zhang was appointed Chief Financial Officer. Mr. Zhang was
      the Director of Finance for Half the Sky Foundation, Inc., a U.S. based
      non-governmental organization, from July 2007 to the present. He was the Finance
      Officer for United Nations Development Program for China Office from April
      2005
      to July 2007. He was the Finance and Audit Officer for European Union Delegation
      to China from December 2002 to April 2005. Mr. Zhang graduated from the Foreign
      Affairs College in Beijing with a Bachelor’s degree in International Relations
      and from the University of California at Riverside with a Master’s degree in
      Business Administration.


41


***Mr.
      Guowei*** **** ***Chen*** ** Mr.
      Chen
      was appointed our director on September 7, 2006 and a member of the auditor
      committee of our board and a member of the compensation committee of our board
      on October 19, 2006. Mr. Chen graduated from East China College of Metallurgy
      with a major in Accounting. From March 2006 to present, Mr. Chen has been the
      general manager and chairman of the board of Shen Zhen Jia Xin Real Estate
      Development Co., Ltd. Prior to that, he was the general manager of Hang Zhou
      Steal Group from 2001 to February 2006. Mr. Chen is very experienced in general
      and financial management.





***Mr.
      Quandong*** **** ***Sun*** ** Mr.
      Sun
      was appointed our director on September 7, 2006 and a member of the auditor
      committee of our board and a member of the compensation committee of our board
      on October 19, 2006. Mr. Sun graduated from Shanghai Maritime University with
      a
      B.S. Mr. Sun has been Chairman of Jidong Shipping Co., Ltd from 1995. Prior to
      that, Mr. Sun served as Manager in the Shipping Department of Shekou Shipping
      Co., Ltd between 1987 to 1994.





***Mr.
      Xinmin Zhang*** Mr.
      Zhang was appointed our director on March 10, 2008. From December 1999 to
      present, Mr. Zhang is the Dean of International Business School, University
      of
      International Business and Economics (“UIBE”) in Beijing, China. From September
      1994 to December 1999, he was the Vice Dean of International Business School,
      UIBE. He is a Certified Public Accountant and also a professor of Accounting
      of
      UIBE. Mr. Zhang now serves as the independent director of three listed companies
      in China which are Minmetals Development Co., Ltd, Gree Corporation, Guangcai
      Construction Co., Ltd. Mr. Zhang obtained his Bachelor of Engineering from
      Northern Industrial University in 1983, his Master of Economics from Renmin
      University in 1989 and his Ph.D. in Management Science from Northeastern
      University of Economics and Trade in 2001.





To
      our
      knowledge, during the last five years, none of our directors and executive
      officers (including those of our subsidiaries) has:




Had
                a bankruptcy petition filed by or against any business of which such
                person was a general partner or executive officer either at the time
                of
                the bankruptcy or within two years prior to that
                time.




Been
                convicted in a criminal proceeding or been subject to a pending criminal
                proceeding, excluding traffic violations and other minor
                offenses.




Been
                subject to any order, judgment or decree, not subsequently reversed,
                suspended or vacated, of any court of competent jurisdiction, permanently
                or temporarily enjoining, barring, suspending or otherwise limiting
                his
                involvement in any type of business, securities or banking
                activities.




Been
                found by a court of competent jurisdiction (in a civil action), the
                SEC,
                or the Commodities Futures Trading Commission to have violated a
                federal
                or state securities or commodities law, and the judgment has not
                been
                reversed, suspended or vacated.





In
      2007,
      the Board of Directors had held three meetings, all the directors were present,
      except John Kuhns missed all three meetings. For each individual committee,
      no
      meeting was held.




***Board
      Composition and Committees***





Our
      board
      of directors currently consists of five members: Yuchuan Liu, Xinmin Zhang,
      Guowei Chen, Quandong Sun and Zhicheng Zhou. Xinmin Zhang and Guowei Chen are
      “independent” as that term is defined by SEC rules.


42


**Compensation
      Committee**





Our
      Compensation Committee comprises three members and is responsible for the
      administration of all salary, bonus and incentive compensation plans for our
      officers and key employees. The members of our Compensation Committee are Xinmin
      Zhang, Guowei Chen and Quandong Sun. Xinmin Zhang and Guowei Chen are
“independent” as that term is defined by SEC rules.




**Audit
      Committee Financial Expert**





Because
      we only recently consummated the reverse merger transaction and appointed the
      current members of our board of directors, our board of directors has not yet
      appointed a member who qualifies as an "audit committee financial expert" as
      defined in Item 401(e) of Regulation S-B, and is "independent" as the term
      is
      used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.





**Audit
      Committee**




Our
      board
      of directors appointed an audit committee on October 19, 2006. Our audit
      committee members are Sun Quan Dong, Chen Guo Wei and Xinmin Zhang. Xinmin
      Zhang
      and Guowei Chen are “independent” as that term is defined by SEC rules. At the
      present time, we believe that the members of our audit committee are
      collectively capable of analyzing and evaluating our financial statements and
      understanding internal controls and procedures for financial reporting. Our
      company, however, recognizes the importance of good corporate governance and
      intends to identify and appoint an audit committee comprised entirely of
      independent directors, including at least one financial expert, in the near
      future.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Exchange Act requires our executive officers, directors and
      beneficial owners of more than ten percent (10%) to report their beneficial
      ownership of equity interests in the company to the SEC. Their initial reports
      are required to be filed using the SEC's Form 3, and they are required to report
      subsequent purchases, sales, and other changes using the SEC's Form 4, which
      must be filed within two business days of most transactions. Officers,
      directors, and persons owning more than 10% of our capital shares are required
      by SEC regulations to furnish us with copies of all of reports they file
      pursuant to Section 16(a).




According
      to our records, Guowei Chen and Zhicheng Zhou and Vision Opportunity Master
      Fund
      Ltd did not file their form 3 in a timely manner.





**Code
      of Ethics**





We
      currently do not have a Code of Ethics and the Board intends to adopt one in
      the
      near future.





**Item
      10.**  **Executive
      Compensation**





We
      had no
      officers or directors whose total annual salary and bonus in 2007 and 2006
      exceeded $100,000 with the exception of Mr. Yuchuan Liu. Mr. Yuchuan Liu was
      appointed chairman of the board, president and chief executive officer on
      September 7, 2006. The compensation amounts paid to Mr. Liu and Mr. Li reflect
      compensation paid to them by the operating subsidiaries of Sino Gas and its
      subsidiaries during the reported periods.


43


***Summary
      Compensation Table***




Name
                and Principal
              Underlying
              Positions
            
            Year
            
            Salary
            
            Bonus
            
            Option
              Awards
            
            Stock
              Awards
            
            All Other
                Compensation
            
            TotalYuchuan
                Liu- President & CEO
            
            
            2007
            
            $
            100,000
            
            
            **50,000
            
            
            
            
            
            
            
            
            
            
            $
            150,0002006
            
            $
            22,800
            
            $
            1,913
            
            
            —
            
            
            —
            
            
            —
            
            $
            24,713Vincent
                Hu CFO (since 11/07)
            
            
            2007
            
            $
            10,000
            
            $
            —
            
            
            
            
            
            
            
            
            —
            
            $
            10,000Fang
                Chen CFO (until 11/07)
            
            
            2007
            
            $
            55,000
            
            $
            **30,000
            
            
            
            
            
            
            
            
            —
            
            $
            85,0002006
            
            $
            11,691
            
            $
            —
            
            
            
            
            
            
            
            
            —
            
            $
            11,691Zhicheng
                Zhou-Chief Operating Officer
            
            
            2007
            
            $
            60,000
            
            
            **30,000
            
            
            
            
            
            
            
            
            
            
            $
            90,000Shuwang
                Li *
            
            
            2006
            
            $
            11691
            
            $
            1,913
            
            
            —
            
            
            
            
            
            —
            
            $
            13604




*
      Mr.
      Shuwang Li, the Chief Operating Officer, resigned from the post in Oct 2006
      and
      only worked for the Company from January to September of 2006. Zhicheng Zhou
      replaced him as our Chief Operating Officer in October 2006.





**
      The
      bonuses have not been paid and are estimates only subject the approval of the
      board of directors.




Our
      Compensation Committee comprises three members and is responsible for the
      administration of all salary, bonus and incentive compensation plans for our
      officers and key employees. The members of our Compensation Committee are Xinmin
      Zhang, Chen Guo Wei and Quandong Sun.





***Outstanding
      Equity Awards***





Mr.
      Shuwang Li, the ex-Chief Operating Officer, was awarded 393,581 common shares
      in
      October 2006.




***Equity
      Compensation Plan***





The
      board
      of directors of the Company adopted a stock option plan on November 19, 2007
      and
      reserved 1,460,000 shares of our common stock as options to be issued under
      the
      plan.





***Retirement,
      Post-Termination and Change in Control Description***





The
      Company currently does not have retirement, post-termination and change in
      control arrangements for its officers.




***Compensation
      of Directors***




Directors
      and employees are not currently additionally compensated for their services
      as a
      director.  Our director compensation consists of cash only. Each director
      is paid an annual retainer of $5,000. An additional $5,000 is paid to one
      director who is also the chairman of the Audit Committee which is vacant now.
      All our directors hold office until the next annual meeting of our shareholders,
      and until their successors have been qualified after being elected or
      appointed.


Name
            
            Fees Earned
              or Paid in
              Cash
              ($)
            
            Stock Awards
              ($)
            
            Option
              Awards ($)
            
            Non-Equity
              Incentive
              Plan
              Compensation
              ($)
            
            Non-Qualified
              Deferred
              Compensation
              Earnings
              ($)
            
            All
              Other
              Compensation
              ($)
            
            Total ($)Yuchuan Liu
            
            
            0
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            0Zhicheng
                Zhou
            
            
            0
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            0Guowei
                Chen
            
            
            5,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,000Quandong
                Sun
            
            
            5,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,000Xinmin
                Zhang
            
            
            5,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,000




**Item
      11.**  **Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters**





The
      following table sets forth, as of March 31, 2008, certain information with
      respect to the beneficial ownership of our equity securities, by (i) any person
      or group with more than 5% of any class of our voting securities, (ii) each
      director, (iii) our chief executive officer and each other executive officer
      and
      (iv) all executive officers and directors as a group. The table reflects the
      ownership of our equity securities by the foregoing parties after the
      304.44-for-1 reverse stock-split of our common stock.





As
      of the
      date of this report, we have outstanding (i) 24,877,271 shares of common stock,
      (ii) no shares of series A convertible preferred stock, (iii) 4,971,859
      shares of series B convertible preferred stock and 95,418 shares of series
      B-1
      preferred stock, (iv) series A warrants to purchase an aggregate of 241,708
      shares of common stock at $3.84 per share, (v) series C warrants to purchase
      an
      aggregate of 3,083,588 shares of common stock at $3.375 per share, (vi) series
      G
      warrants to purchase an aggregate of 109,489 shares of common stock at $3.84
      per
      share, (vii) series F warrants to purchase an aggregate of 271,074 shares of
      common stock and (viii) placement agent warrant to purchase an aggregate of
      271,074 shares of common stock. The warrants are exercisable until September
      2012. The placement agent warrant is exercisable until September 2010. The
      warrants have cashless exercise provision entitling the holders to obtain shares
      equal to the product of (1) the nominator is the difference between the market
      value of all the exercised shares on the date of exercise and the exercise
      price
      of all the exercised shares and (2) the denominator is the market price per
      share on the date of exercise.


44




Shares
      of
      Series B convertible preferred stock vote together with shares of common stock
      on all matters upon which stockholders are entitled to vote. On those matters
      upon which the series B convertible preferred stock votes together with the
      common stock as a single class, each share of series B convertible preferred
      stock carries a number of votes equal to the number of shares of common stock
      that would be issuable upon conversion. Each holder of series B convertible
      preferred stock shall be entitled to notice of any stockholders’ meeting in
      accordance with our bylaws. Series B-1 preferred stock have the same rights
      and
      privileges as series B preferred stock.




In
      determining beneficial ownership of the common stock, the number of shares
      shown
      includes shares which the beneficial owner may acquire upon exercise of warrants
      or options which may be acquired within 60 days. In determining the percent
      of
      common stock owned by a person on March 31, 2008, (a) the numerator is the
      number of shares of the class beneficially owned by such person, including
      shares which the beneficial ownership may acquire within 60 days upon conversion
      of the series B convertible preferred stock or exercise of the warrants and
      option, and (b) the denominator is the sum of (i) the total shares of that
      class
      outstanding on March 31, 2008, and (ii) the total number of shares that the
      beneficial owner has acquired or may acquire upon conversion of the
      series B convertible preferred stock or exercise of the warrants and option.
      Unless otherwise stated, each beneficial owner has sole power to vote and
      dispose of the shares.





Except
      as
      otherwise stated, the address of the directors and executive officers listed
      in
      the table is:





c/o
      Beijing Zhong Ran Wei Ye Gas Co., Ltd.


N0.18
      Zhong Guan Cun Dong St.


Haidian
      District


Beijing,
      China 10083




Amount and Nature of
              Beneficial
              Ownership
            
            Percent of ClassShareholder
            
            Series
              B Preferred
              Stock(1)
            
            Common
              Stock(2)
            
            Series
              B Preferred Stock
            
            Common Stock**Owner
                of More than 5% of Class**Eloten
                Group Ltd.
            
            
            
            
            
            6,524,174
            (5)(6)
            
            
            
            
            26.2
            %Leading
                King Investment Limited
            
            
            
            
            
            5,384,923
            (7)(8)
            
            
            
            
            21.6
            %Vision
                Opportunity Master Fund, Ltd.
            
            
            4,475,831
            
            
            2,756,824
            
            
            88.3
            %
            
            11.1
            %T.
                Rowe Price Small-Cap Value Fund, Inc.
            
            
            
            
            
            2,444,444
            
            
            
            
            
            9.8
            %**Directors
                and Executive Officers**Liu
                Yuchuan
            
            
            
            
            
            6,524,174
            (5)(6)
            
            
            
            
            26.2
            %Sun
                Quandong
            
            
            
            
            
            5,384,923
            (7)(8)
            
            
            
            
            21.6
            %Zhong
                Zhimin
            
            
            
            
            
            393,81
            (3)
            
            
            
            
            0.16
            %Zhou
                Zhicheng
            
            
            
            
            
            -Bian
                Shukui
            
            
            
            
            
            173,962
            (3)
            
            
            
            
            0.7
            %Chen
                Fang
            
            
            
            
            
            65,604
            (3)
            
            
            
            
            0.26
            %Chen
                Guowei
            
            
            
            
            
            -
            (3)
            
            
            
            
            -John
                Kuhns
            
            
            
            
            
            635,822
            (4)
            
            
            
            
            2.56
            %**All
                Directors and Executive Officers**
            
            
            
            
            
            12,823,866
            %
            
            
            
            
            51.5
            %




45





(1)
      The
      Series B convertible preferred stock and the warrants are assumed to be
      non-convertible and non-exercisable within 60 days of their date of issuance.
      There are conversion restrictions placed on series B preferred stock and
      warrants to avoid the series B preferred stock holders and warrant holders
      owning more than 9.9% of total common stock for each individual series B
      preferred stock holder or warrant holder. Series B preferred stock holder can
      waive the restriction upon 61 days notice to the Company. Warrant holders cannot
      waive such restriction.





(2)
      Only
      shares of common stock are listed because of restrictions imposed on series
      B
      and B-1 preferred shares and warrants as stated in (1) above.





(3)
      Shares of common stock issued to Gas (BVI) as a result of the consummation
      of
      the share exchange agreement are beneficially attributed to each of the Gas
      (BVI) shareholders based on each shareholder's percentage ownership interest
      in
      Gas (BVI) immediately prior to execution of the share exchange
      agreement.




(4)
      Includes common shares issued upon the conversion, on February 23, 2007, of
      (i)
      113,847 shares of series B convertible preferred stock issued to Kuhns Brothers,
      Inc., which are beneficially attributed to John Kuhns, and (ii) 56,925 shares
      of
      series B convertible preferred stock issued to John Kuhns.





(5)
      Includes 6,524,174 common shares issued upon conversion of series A convertible
      preferred stock to Eloten Group Ltd., which are beneficially attributed to
      Mr.
      Liu Yu Chuan. Mr. Liu and his wife hold an aggregate of 100% ownership interest
      in Eloten Group Ltd.





(6)
      Includes 108,286 shares of common stock beneficially attributed to Eloten Group
      Ltd. based on Eloten Group Ltd.'s ownership interest in Gas (BVI).





(7)
      Includes 5,384,923 common shares issued upon conversion of series A convertible
      preferred stock to Leading King Investment Limited, which are beneficially
      attributed to Mr. Sun Quan Dong. Mr. Sun holds 50% ownership interest in Leading
      King Investment Limited.





(8)
      Includes 89,377 shares of common stock beneficially attributed to Leading King
      Investment Limited based on Leading King Investment Limited's ownership interest
      in Gas (BVI). Mr. Sun holds a 50% ownership interest in Leading King Investment
      Limited.





**Item
      12.**  **Certain
      Relationships and Related Transactions**





On
      January 15, 2007, Beijing Gas acquired 100% equity interest of Beijing Chenguang
      Gas Ltd., Co. for a purchase price of 26,000,000 RMB (or approximately USD3.35
      million) in cash. Beijing Chenguang became a wholly-owned subsidiary of Beijing
      Gas. Beijing Chenguang is primarily engaged in the business of developing,
      transfer and licensing of technologies regarding natural gas purification,
      compression and transportation., as well as installation of natural gas
      equipment and supply of natural gas. Mr. Zhicheng Zhou, our Chief Operating
      Officer, owned 30% of Beijng Chenguang immediately prior to the
      acquisition.


46





**ITEM
      13.**  **EXHIBITS**




Exhibit
              Number3.1
            
            Articles
                of Incorporation, as amended on November 14, 2006 incorporated by
                reference from 10-Q filed on August 20, 2007.3.2*
            
            Bylaws.3.3*
            
            Certificate
                of Designations authorizing the Series A Convertible Preferred
                Stock.3.4*
            
            Amended
                and Restated Certificate of Designations authorizing the Series B
                Convertible Preferred Stock.4.1**
            
            Series
                B Stock Purchase Agreement, dated as of September 7, 2006, by and
                among,
                Dolce Ventures, Inc., Vision Opportunity Master Fund, Ltd. and each
                of the
                other investors party thereto.4.2**
            
            Registration
                Rights Agreement, dated as of September 7, 2006, by and between,
                Dolce
                Ventures, Inc., Vision Opportunity Master Fund, Ltd.4.3**
            
            Lock-Up
                Agreement, dated as of September 7, 2006, by and among, Dolce Ventures,
                Inc., Leading King Investment Limited, Eloten Group, Ltd., Cheng
                Fang and
                certain other parties named therein.4.4*
            
            Form
                of Series A Warrant.4.5*
            
            Form
                of Series B Warrant.4.6*
            
            Form
                of Series C Warrant.4.7*
            
            Form
                of Series D Warrant.4.8*
            
            Form
                of Series J Warrant.4.9**
            
            Share
                Exchange Agreement dated as of September 7, 2006, by and between,
                Dolce
                Ventures, Inc., Yu-chuan Liu, and each of the other parties named
                therein.4.10**
            
            Stock
                Purchase Agreement dated as of August 24, 2006, by and between, Gas
                Investment China Co., Ltd. and each of the other parties named
                therein.4.11**
            
            Consulting
                Agreement dated August 8, 2006, by and between Kuhns Brothers, Inc.
                and
                Dolce Ventures, Inc.4.12**
            
            Engagement
                Letter dated Feb 15, 2006, by and between, Beijing Zhong Ran Wei
                Ye Gas
                Co., Ltd. and Kuhns Brothers, Inc.4.13**
            
            Escrow
                Agreement dated September 7, 2006, by and between, Gas Investment
                China
                Co., Ltd., Vision Opportunity Master Fund, Ltd. and Kramer Levin
                Naftalis
                & Frankel LLP.




47




4.14****
            
            Securities
                Purchase Agreement dated as of September 7, 2007 by and among the
                Company
                and the investors named therein.4.15****
            
            Registration
                Rights Agreement dated as of September 7, 2007 by and among the Company
                and the investors named therein.4.16****
            
            Make
                Good Escrow Agreement dated as of September 7, 2007 by and between
                the
                Company, the investors and Manufacturers and Traders Trust Company,
                as
                escrow agent.4.17***
            
            Series
                B Stock Purchase Agreement, dated as of October 20, 2006, by and
                among,
                Dolce Ventures, Inc., and each of the other investors named
                therein.4.18***
            
            Registration
                Rights Agreement, dated as of October 20, 2006, by and between, Dolce
                Ventures, Inc., and each of the other investors named
                therein.4.19***
            
            Form
                of Lock-Up Agreement, by and among, Docle Ventures, Inc., and certain
                other parties named therein.10.1
            
            Urban
                Gas Development Agreement with Jinzhou Town incorporated by reference
                from
                SB-2 filed on January 11, 2008, file number 333-14799810.2
            
            Municipal
                Public Utilities Franchise Agreement with Yutian County incorporated
                by
                reference from SB-2 filed on January 11, 2008, file number
                333-14799810.3
            
            Urban
                Gas Development Agreement with Yutian County incorporated by reference
                from SB-2 filed on January 11, 2008, file number
                333-14799810.4
            
            Urban
                Gas Development Agreement with Wuqiao County incorporated by reference
                from SB-2 filed on January 11, 2008, file number
                333-14799810.5
            
            The
                Agreement on Developing the Pipeline Gas Project with Xintang County
                incorporated by reference from SB-2 filed on January 11, 2008, file
                number
                333-14799810.6
            
            Urban
                Gas Development Agreement with Linzhang County incorporated by reference
                from SB-2 filed on January 11, 2008, file number
                333-14799810.7
            
            Urban
                Gas Development Agreement with Ningjin County incorporated by reference
                from SB-2 filed on January 11, 2008, file number
                333-14799810.8
            
            Urban
                Gas Development Agreement with Luquan County incorporated by reference
                from SB-2 filed on January 11, 2008, file number
                333-14799810.9
            
            Gas
                Supply Contract- Henan Zhongyuan Lvneng High-Tech Co., Ltd incorporated
                by
                reference from SB-2 filed on January 11, 2008, file number
                333-14799810.10
            
            Gas
                Supply Contract-PetroChina Huabei Oilfield Company incorporated by
                reference from SB-2 filed on January 11, 2008, file number
                333-147998




48





10.11
            
            Gas
                Supply Contract-Tianjin Dagang Oilfield Transportation Co., Ltd
                incorporated by reference from SB-2 filed on January 11, 2008, file
                number
                333-14799810.12
            
            Gas
                Supply Contract-Hebei Natural Gas Co., Ltd incorporated by reference
                from
                SB-2 filed on January 11, 2008, file number 333-14799810.13
            
            Gas
                Supply Contract-Xinjiang Guanghui LNG Development Co., Ltd incorporated
                by
                reference from SB-2 filed on January 11, 2008, file number
                333-14799810.14
            
            Pipe
                Gas Franchise Agreement for Baishan City incorporated by reference
                from
                SB-2 filed on January 11, 2008, file number 333-14799810.15
            
            Pipe
                Gas Franchise Agreement for Si County incorporated by reference from
                SB-2
                filed on January 11, 2008, file number 333-14799810.16
            
            Pipe
                Gas Franchise Agreement for Xiahuayuan District incorporated by reference
                from SB-2 filed on January 11, 2008, file number
                333-14799810.17
            
            Pipe
                Gas Franchise Agreement for Yu County incorporated by reference from
                SB-2
                filed on January 11, 2008, file number 333-14799810.18
            
            Pipe
                Gas Franchise Agreement for Wuhe County incorporated by reference
                from
                SB-2 filed on January 11, 2008, file number 333-14799810.19
            
            Pipe
                Gas Franchise Agreement for Zaoqiang County incorporated by reference
                from
                SB-2 filed on January 11, 2008, file number 333-14799810.20
            
            The
                Cooperation Agreement on Gas Project in Xinji Town incorporated by
                reference from SB-2 filed on January 11, 2008, file number
                333-14799810.21
            
            The
                Cooperation Agreement with Chengan County incorporated by reference
                from
                SB-2 filed on January 11, 2008, file number 333-14799810.22
            
            Urban
                Gas Development Agreement with Nangong Town incorporated by reference
                from
                SB-2 filed on January 11, 2008, file number 333-14799810.23
            
            Pipe
                Gas Franchise Agreement for Pei County incorporated by reference
                from SB-2
                filed on January 11, 2008, file number 333-14799810.24
            
            Urban
                Gas Development Agreement with Gucheng County incorporated by reference
                from SB-2 filed on January 11, 2008, file number
                333-14799810.25
            
            Urban
                Pipe Natural Gas Project Development Agreement with Sihong County
                incorporated by reference from SB-2 filed on January 11, 2008, file
                number
                333-14799810.26
            
            Urban
                Gas Development Agreement with Changli County incorporated by reference
                from SB-2 filed on January 11, 2008, file number
                333-14799810.27
            
            Urban
                Gas Development Agreement with Shenzhou Town incorporated by reference
                from SB-2 filed on January 11, 2008, file number
                333-14799810.28
            
            Urban
                Gas Development Agreement with Longyao County incorporated by reference
                from SB-2 filed on January 11, 2008, file number
                333-147998




49





16.1*
            
            Letter
                dated September 7, 2006 from Dolce Ventures, Inc. to Robison, Hill
&
                Co.16.2*
            
            Letter
                dated September 12, 2006 from Robison, Hill & Co. to the
                SEC.21.1
            
            List
                of Subsidiaries incorporated by reference from SB-2 filed on January
                11,
                2008, file number 333-14799831.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant
                to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes-Oxley Act of 2002.*
            
            Incorporated
                by reference from Form 8-K filed September 7,
                2006.**
            
            Incorporated
                by reference from Form 8-K/A filed on November 28,
                2007.***
            
            Incorporated
                by reference from Form 8-K/A filed on November 27,
                2007.****
            
            Incorporated
                by reference from Form 8-K filed September 13,
                2007.





**Item
      14.**  **Principal
      Accountant Fees and Services**




Aggregate
      fees billed by the Company's current principal accountants, Samuel H.
      Wong & Co., LLP, for audit services related to the most recent fiscal
      year, and for other professional services billed in the most recent fiscal
      year, were as follows:





FISCAL 2007
            
            FISCAL 2006Audit
                Fees (1)
            
            $
            100,000
            
            
            100,000Audit-Related
                Fees
            
            
            —
            
            
            —Tax
                Fees (2)
            
            
            —
            
            
            —All
                Other Fees
            
            
            —
            
            
            —Total
            
            $
            100,000
            
            
            100,000





(1)
            Comprised
                of the audit of the Company's  annual  financial 
                statements  and  reviews of the Company's quarterly 
                financial  statements,  as well as consents related to and
                reviews of other documents filed with the Securities and Exchange
                Commission.




(2)
            Comprised 
                of  preparation  of all federal and
                state corporate income tax returns for the Company and its
                subsidiaries.




50





SIGNATURES





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this Report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




**SINO GAS INTERNATIONAL HOLDINGS, INC.**Date:
                May 22, 2008
            By:
            */s/
                Liu Yu Chuan**Liu
                Yu Chuan**Chairman of the Board, Director,*
              *President and Chief Executive Officer*




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, this Report has been signed below by the following persons on behalf
      of
      the Registrant and in the capacities and on the dates indicated.




Signatures
            
            Title
            
            Date/s/
                Yuchuan Liu
            
            Chief
                Executive Officer and Director
            
            May
                22, 2008Yuchuan
                Liu
            
            (Principal
                Executive Officer)/s/
                Yong Zhang
            
            Chief
                Financial Officer
            
            May
                  22, 2008Yong
                Zhang/s/
                Guowei Chen
            
            Director
            
            May
                  22, 2008Guowei
                Chen/s/
                Quandong Sun
            
            Director
            
            May
                  22, 2008Quandong
                Sun/s/
                Xinmin Zhang
            
            Director
            
            May
                  22, 2008Xinmin
                Zhang/s/
                Zhicheng Zhou
            
            Director
                and Chief Operating Officer
            
            May
                  22, 2008Zhicheng
                Zhou




51





**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**


**INDEX
      TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2007, AND
      2006**




52




**SINO
      GAS INTERNAIONAL HOLDINGS, INC**





**CONSOLIDATED
      FINANCIAL STATEMENTS**





**DECEMBER
      31, 2007 AND 2006**





**(Stated
      in US dollars)**




53







**Sino
      Gas International Holdings Inc.**





**CONTENTS**
            
            **PAGES**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNT FIRM
            
            
            F-1CONSOLIDATED
                BALANCE SHEETS
            
            
            F-2
                - F-3CONSOLIDATED
                STATEMENTS OF INCOME
            
            
            F-4CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS’ EQUITY
            
            
            F-5CONSOLIDATED
                STATEMENTS OF CASH FLOWS
            
            
            F-6NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
            
            
            F-7
                - F-29









**Report
      of Independent Registered Public Accounting Firm**





To:
      The
      Board of Directors and Stockholders of


Sino
      Gas
      International Holdings, Inc.





We
      have
      audited the accompanying consolidated balance sheets of Sino Gas International
      Holdings, Inc. as of December 31, 2007 and 2006, and the related consolidated
      statements of operations, stockholders' equity, and cash flows for the years
      then ended. These financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Sino Gas International Holdings,
      Inc as of December 31, 2007 and 2006, and the results of its operations and
      its
      cash flows for each of the years then ended in conformity with accounting
      principles generally accepted in the United States of America.





South
                San Francisco, California
            Samuel
                H. Wong & Co., LLPMarch
                25, 2008
            Certified
                Public Accountants




F-1





**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**AS
      OF DECEMBER 31, 2007 AND 2006**


**(Stated
      in US Dollars)**





**December 31,**
            
            **December 31,****Notes**
            
            **2007**
            
            **2006****ASSETS**Current
                assetsCash
                and cash equivalents
            
            
            2*(e*)**
            
            $
            10,915,590
            
            $
            3,638,673Restricted
                cash
            
            
            3
            
            
            478,920
            
            
            3,124,541Notes
                receivable
            
            
            
            
            
            825,119
            
            
            477,390Accounts
                receivable
            
            
            2*(f),*
                4
            
            
            7,315,253
            
            
            6,534,740Inventory
            
            
            
            
            
            207,976
            
            
            -Advances
                to suppliers
            
            
            2*(g*)**
            
            
            27,372
            
            
            68,309Prepayments
                and others
            
            
            
            
            
            320,380
            
            
            141,878Other
                receivables
            
            
            2*(f*)**
            
            
            3,100,695
            
            
            1,263,800Total
                current assets
            
            
            
            
            
            23,191,305
            
            
            15,249,331Non –
                current AssetsInvestment
            
            
            2*(h),*
                5
            
            
            4,007,310
            
            
            2,939,029Plant
                and equipment, net
            
            
            2*(j),*
                6
            
            
            24,572,565
            
            
            10,608,530Construction
                in progress
            
            
            2*(l*)**
            
            
            11,556,820
            
            
            4,628,076Intangible
                Assets, net
            
            
            2*(k),*
                7
            
            
            2,028,250
            
            
            457,830Total
                non-current assets
            
            
            
            
            
            42,164,945
            
            
            18,633,465**TOTAL
                ASSETS**
            
            
            
            
            $
            65,356,250
            
            $
            33,882,796**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilitiesBank
                Loans
            
            
            8
            
            $
            2,734,444
            
            $
            2,430,445Accounts
                payable
            
            
            
            
            
            716,707
            
            
            3,891,388Other
                payable
            
            
            9
            
            
            10,383,657
            
            
            1,790,500Unearned
                revenue
            
            
            2*(m*)**
            
            
            312,573
            
            
            37,760Accrued
                liabilities
            
            
            
            
            
            362,263
            
            
            418,390Total
                current liabilities
            
            
            
            
            
            14,509,644
            
            
            8,568,483**TOTAL
                LIABILITIES**
            
            
            
            
            $
            14,509,644
            
            $
            8,568,483





See
      Accompanying Notes to the Financial Statements and Accountant’s
      Report





F-2




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**


**CONSOLIDATED
      BALANCE SHEETS (Continued)**


**AS
      OF DECEMBER 31, 2007 AND 2006**


**(Stated
      in US Dollars)**





**December 31,**
            
            **December 31,****Notes**
            
            **2007**
            
            **2006****STOCKHOLDERS’
                EQUITY**Preferred
                Stock A US$0.001 par value; 20,000,000 authorized; 275,111 and 0
                issued
                and outstanding as of December 31, 2007 and 2006
                respectively
            
            
            
            
            $
            275
            
            
            -Preferred
                Stock B US$0.001 par value; 5,000,000 authorized; 4,971,859 and 4,023,268
                issued and outstanding as of December 31, 2007 and 2006
                respectively
            
            
            10
            
            
            4,972
            
            
            4,023Common
                Stock US$0.001 par value; 250,000,000 authorized; 25,282,380 and
                14,693,186 issued and outstanding as of December 31, 2007 and 2006
                respectively
            
            
            10
            
            
            25,283
            
            
            14,694Additional
                paid-in-capital
            
            
            10
            
            
            35,247,303
            
            
            18,488,040Statutory
                reserves
            
            
            2*(v*
            *)*
            
            3,258,201
            
            
            2,025,022Retained
                earnings
            
            
            
            
            
            10,524,898
            
            
            4,050,707Accumulated
                other comprehensive income
            
            
            2*(x*
            *)*
            
            1,878,142
            
            
            824,29650,939,074
            
            
            25,406,781**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            
            
            
            $
            65,356,250
            
            $
            33,882,796





See
      Accompanying Notes to the Financial Statements and Accountant’s
      Report





F-3




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**FOR
      THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006**


**(Stated
      in US Dollars)**


**December 31,**
              
              **December 31,****Notes**
              
              **2007**
              
              **2006****Net Sales**Revenues
              
              
              
              
              $
              20,267,756
              
              $
              10,870,718Cost
                  of revenues
              
              
              
              
              
              (9,499,752
              )
              
              (4,389,142
              )Gross
                  profit
              
              
              
              
              
              10,768,004
              
              
              6,481,576**Operating
                  Expenses**Selling
                  and marketing expenses
              
              
              
              
              
              (608,830
              )
              
              (95,779
              )General
                  and administrative expenses
              
              
              
              
              
              (2,106,389
              )
              
              (1,155,849
              )Total
                  operating expenses
              
              
              
              
              
              (2,715,219
              )
              
              (1,251,628
              )Operating
                  Income/(Loss)
              
              
              
              
              
              8,052,785
              
              
              5,229,948**Other
                  Income (Expenses)**Investment
                  income
              
              
              2*(q*)**
              
              
              212,883Other
                  income
              
              
              
              
              
              29,942
              
              
              438,186Other
                  expense
              
              
              
              
              
              (18,890
              )
              
              (93,324
              )Interest
                  income
              
              
              
              
              
              149,270
              
              
              -Interest
                  expense
              
              
              
              
              
              (197,959
              )
              
              (78,237
              )Total
                  other income (expense)
              
              
              
              
              
              187,086
              
              
              359,093Earnings
                  before taxation
              
              
              
              
              
              8,228,032
              
              
              5,496,573Income
                  tax
              
              
              2*(r),*11
              
              
              (531,612
              )
              
              (423,284
              )Net
                  income
              
              
              
              
              $
              7,707,370
              
              $
              5,165,7575,073,289Constructive
                  Preferred Dividend - Amortization of Beneficial Conversion
              
              
              
              
              
              -
              
              
              6,418,864Income
                  Available to Common Stock Shareholders
              
              
              
              
              $
              7,707,370
              
              $
              (1,345,575
              )Earnings
                  per share 2*(z)*Basic
              
              
              
              
              $
              0.45
              
              $
              (0.09
              )Diluted
              
              
              
              
              $
              0.35
              
              $
              0.33Weighted
                  average shares outstanding of common stockBasic
              
              
              
              
              
              17,165,894
              
              
              14,693,186Diluted
              
              
              
              
              
              22,017,096
              
              
              15,699,003EPS
                  excluding effect of Constructive Preferred DividendBasic
              
              
              
              
              $
              0.45
              
              $
              0.35Diluted
              
              
              
              
              $
              0.35
              
              $
              0.33




See
      Accompanying Notes to the Financial Statements and Accountant’s
      Report





F-4




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**AS
      OF DECEMBER 31, 2007 AND 2006**


**(Stated
      in US Dollars)**


**Accumulated****Preferred Stock A**
              
              **Preferred Stock B**
              
              **Common Stock**
              
              **Additional**
              
              
              
              
              
              **Other****Shares**
              
              
              
              **Shares**
              
              
              
              **Shares**
              
              
              
              **Paid in**
              
              **Statutory**
              
              **Retained**
              
              **Comprehensive****Outstanding**
              
              **Amount**
              
              **Outstanding**
              
              **Amount**
              
              **Outstanding**
              
              **Amount**
              
              **Capital**
              
              **Reserve**
              
              **Earnings**
              
              **Income**
              
              **Total**Balance,
                  January 1, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              14,361,646
              
              
              14,362
              
              
              4,812,650
              
              
              1,219,720
              
              
              6,311,794
              
              
              267,865
              
              
              12,626,391Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,165,757
              
              
              
              
              
              5,165,757Reverse
                  acquisition
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              331,540
              
              
              332
              
              
              
              
              
              
              
              
              (202,678
              )
              
              
              
              
              -202,346Issue
                  of stock and warrant
              
              
              -
              
              
              -
              
              
              4,023,268
              
              
              4,023
              
              
              -
              
              
              -
              
              
              7,256,526
              
              
              
              
              
              
              
              
              
              
              
              7,260,549Constructive
                  Preferred Dividend - Amortization of Beneficial Conversion
                  Feature
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,418,864
              
              
              
              
              
              (6,418,864
              )
              
              
              
              
              -Appropriations
                  of Retained Earnings
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              805,302
              
              
              (805,302
              )
              
              
              
              
              -Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              556,431
              
              
              556,431Balance,
                  December 31, 2006
              
              
              -
              
              
              -
              
              
              4,023,268
              
              
              4,023
              
              
              14,693,186
              
              
              14,694
              
              
              18,488,040
              
              
              2,025,022
              
              
              4,050,707
              
              
              824,296
              
              
              25,406,782Balance,
                  January 1, 2007
              
              
              -
              
              
              -
              
              
              4,023,268
              
              
              4,023
              
              
              14,693,186
              
              
              14,694
              
              
              18,488,040
              
              
              2,025,022
              
              
              4,050,707
              
              
              824,296
              
              
              25,406,782Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,707,370
              
              
              
              
              
              7,707,370Issue
                  of stock and warrant
              
              
              275,111
              
              
              275
              
              
              948,591
              
              
              949
              
              
              10,589,194
              
              
              10,589
              
              
              16,759,263
              
              
              
              
              
              
              
              
              
              
              
              16,771,076Appropriations
                  of Retained Earnings
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,233,179
              
              
              (1,233,179
              )
              
              
              
              
              -Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,053,846
              
              
              1,053,846Balance,
                  December 31, 2007
              
              
              275,111
              
              
              275
              
              
              4,971,859
              
              
              4,972
              
              
              25,282,380
              
              
              25,283
              
              
              35,247,303
              
              
              3,258,201
              
              
              10,524,898
              
              
              1,878,142
              
              
              50,939,074
  **Accumulated Comprehensive Income****2006**
              
              **2007**
              
              **Total**Comprehensive
                IncomeNet
                  Income
              
              
              5,073,289
              
              
              7,707,370
              
              
              12,873,077Comprehensive
                  Other IncomeForeign
                  Currency Translation Adjustment
              
              
              556,431
              
              
              1,053,846
              
              
              1,610,2775,629,720
              
              
              8,761,216
              
              
              14,483,354




See
      Accompanying Notes to the Financial Statements and Accountant’s
      Report





F-5




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006**


**(Stated
      in US Dollars)**


2007
              
              2006**Cash
                  flows from operating activities**Net
                  income
              
              $
              7,707,370
              
              $
              5,073,289Depreciation
                  expense
              
              
              1,301,480
              
              
              155,374Amortization
                  expense
              
              
              323,815
              
              
              -Invested
                  in restricted time deposits
              
              
              2,645,622
              
              
              (3,124,541
              )Equity
                  in investments
              
              
              -
              
              
              (495,651
              )Decrease/(increase)
                  in accounts receivables
              
              
              (2,960,960
              )
              
              73,674Increase
                  in inventory
              
              
              (207,976
              )
              
              -Increase
                  in prepaid expenses
              
              
              (178,502
              )
              
              -Increase
                  in accounts payable
              
              
              5,637,161
              
              
              447,784Cash
                  sourced/(used) in operating activities
              
              
              14,304,770
              
              
              2,162,767**Cash
                  flows from investing activities**Cash
                  paid for investment and acqusition
              
              
              (1,068,281
              )
              
              -Purchase
                  of property, plant and equipment
              
              
              (15,265,515
              )
              
              (7,563,222
              )Purchase
                  of intangible assets
              
              
              (1,894,234
              )
              
              (20,565
              )Increase
                  in construction in progress
              
              
              (6,928,745
              )
              
              (1,556,579
              )Cash
                  sourced/(used) in investing activities
              
              
              (25,156,775
              )
              
              (9,140,366
              )**Cash
                  flows from financing activities**Bank
                  Loans
              
              
              303,999
              
              
              2,430,445Proceeds
                  of issuance of common stock
              
              
              16,771,077
              
              
              7,430,965Cash
                  Used/(sourced) in financing activities
              
              
              17,075,076
              
              
              9,861,410Net
                  Increase/(Decrease) in Cash & Cash Equivalents for the
                  year
              
              
              6,223,070
              
              
              2,883,811Cash
                  and cash equivalents-beginning of year
              
              
              3,638,673
              
              
              571,194Cash
                  and cash equivalents-end of year
              
              $
              10,915,590
              
              $
              3,638,673
  Supplementary
                  cash flow informationInterest
                  received
              
              
              149,270Interest
                  Paid
              
              
              197,959
              
              
              78,237Income
                  tax paid
              
              
              774,555
              
              
              615,694




See
      Accompanying Notes to the Financial Statements and Accountant’s
      Report




F-6


**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**1.**
            **ORGANIZATION
                AND PRINCIPAL ACTIVITIES**





Sino
      Gas
      International Holdings, Inc. (“the Company”) was incorporated under the laws of
      the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company
      changed its name to American Arms, Inc. on April 5, 1984, and then changed
      its
      name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed its name
      to
      Sino Gas International Holdings, Inc. on November 17, 2006.





On
      September 7, 2006, the Company underwent a reverse-merger with Gas Investment
      China Ltd. (“GIC”), an International Business Company incorporated in the
      British Virgin Islands, and its wholly-owned subsidiaries, involving an exchange
      of shares whereby the Company issued an aggregate of 14,361,646 shares to the
      shareholders of GIC in exchange for all of the issued and outstanding shares
      of
      GIC. For financial reporting purposes, this transaction is classified as a
      recapitalization of Sino Gas International Holdings, Inc. (Legal acquirer,
      accounting acquiree) and the historical financial statements of Gas Investment
      China Co. Ltd. (Legal acquiree, accounting acquirer)





The
      Company is a natural gas services operator, principally engaging in the
      investment, operation and management of city gas pipeline infrastructure, in
      the
      distribution of natural gas to residential and industrial users, in the
      construction and operation gas stations, and in the development and application
      of natural gas related technologies. The Company owns and operates 24 natural
      gas distribution systems serving approximately 87,500 residential and five
      commercial and industrial customers. The Company’s facilities include
      approximately 700 kilometers of pipeline and delivery networks (including
      delivery trucks) with a designed daily capacity of approximately 70,000 cubic
      meters of natural gas.





The
      common stock of the Company is currently quoted on the National Association
      of
      Securities Dealers' Over-the-Counter Bulletin Board under the symbol
“SGAS”.





Basis
      of Presentation and Organization





The
      Company’s consolidated financial statements have been prepared in accordance
      with generally accepted accounting principles in the United States of America
      (“US GAAP”).




This
      basis of accounting differs in certain material respects from that used for
      the
      preparation of the books of account of the Company’s principal subsidiaries,
      which are prepared in accordance with the accounting principles and the relevant
      financial regulations applicable to enterprises with limited liabilities
      established in the PRC (“PRC GAAP”) or in the accounting standards used in the
      places of their domicile. The accompanying consolidated financial statements
      reflect necessary adjustments not recorded in the books of account of the
      Company’s subsidiaries to present them in conformity with US GAAP.





F-7




Recent
      Acquisitions





On
      January 15, 2007, Beijing Gas entered into a stock transfer agreement with
      the
      shareholders of Beijing Chenguang Gas Ltd., Co., a limited liability company
      organized under the laws of the PRC, under which Beijing Gas will acquire all
      the capital stock of Beijing Chenguang for a purchase price of RMB 26 million
      (or approximately $3.35 million) in cash. Upon consummation of the transactions
      contemplated by that agreement, Beijing Chenguang will become a wholly-owned
      subsidiary of Beijing Gas. Beijing Chenguang is primarily engaged in the
      development, transfer and licensing of technologies used in natural gas
      purification, compression and transportation, as well as the installation of
      natural gas equipment and the supply of natural gas.





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**




(a) Method of Accounting





The
      Company maintains its general ledger and journals with the accrual method
      accounting for financial reporting purposes. The financial statements and notes
      are representations of management. Accounting policies adopted by the Company
      conform to generally accepted accounting principles in the United States of
      America and have been consistently applied in the presentation of financial
      statements, which are compiled on the accrual basis of accounting.




(b) Use
      of estimates




The
      preparation of the financial statements in conformity with generally accepted
      accounting principles in the United States of America requires management to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting periods. Management makes these estimates using the best
      information available at the time the estimates are made; however actual results
      could differ materially from those estimates.




(c) Economic and political risks




The
      Company’s operations are conducted in the PRC. Accordingly, the Company’s
      business, financial condition and results of operations may be influenced by
      the
      political, economic and legal environment in the PRC, and by the general state
      of the PRC economy.




The
      Company’s operations in the PRC are subject to special considerations and
      significant risks not typically associated with companies in North America
      and
      Western Europe. These include risks associated with, among others, the
      political, economic and legal environment and foreign currency exchange. The
      Company’s results may be adversely affected by changes in the political and
      social conditions in the PRC, and by changes in governmental policies with
      respect to laws and regulations, anti-inflationary measures, currency
      conversion, remittances abroad, and rates and methods of taxation, among other
      things.





F-8








(d)Principles
                of Consolidation





The
      consolidated financial statements include the accounts of the Company and its
      subsidiaries (“the Group”). Significant inter-company transactions have been
      eliminated in consolidation. Investments in which the company has a 20 percent
      to 50 percent voting interest and where the company exercises significant
      influence over the investor are accounted for using the equity
      method.





The
      Company owned its subsidiaries soon after its inception and continued to acquire
      and own the equity interests throughout the reporting periods. The following
      table depicts the identities of the consolidating subsidiaries as of December
      31, 2007 and 2006 (whichever applicable 2006).





Name of Company
            
            Place of
              Incorporation
            
            Date of
              Incorporation
            
            Beneficiary
              interest %
            
            Equity
              Interest %
            
            Registered
              CapitalGAS Investment China Co.,
                Ltd.
            
            
            The BritishVirgin Islands
            
            
            6/19/2003
            
            
            100
            
            
            100
            
            
            USD
                10,000,000Sino Gas
                Construction Limited
            
            
            The BritishVirgin Islands
            
            
            1/9/2007
            
            
            100
            
            
            100
            
            
            USD
                50,000Sino
                Gas Investment Development Limited
            
            
            The British
              Virgin
                Islands
            
            
            1/9/2007
            
            
            100
            
            
            100
            
            
            USD
                50,000Beijing
                Zhong Ran Wei Ye Gas Co., Ltd
            
            
            PRC
            
            
            8/29/2001
            
            
            100
            
            
            100
            
            
            RMB 150,000,000Peixian
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            8/22/2005
            
            
            100
            
            
            90
            
            
            RMB
                5,000,000Sihong
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            12/3/2004
            
            
            100
            
            
            95
            
            
            RMB
                10,000,000Wuhe
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            1/30/2007
            
            
            100
            
            
            100
            
            
            RMB
                3,000,000Changli
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            12/8/2006
            
            
            100
            
            
            100
            
            
            RMB
                3,000,000Yutian
                Zhongran Weiye Gas Co., Ltd
            
            
            PRC
            
            
            12/19/2003
            
            
            100
            
            
            90
            
            
            RMB
                3,000,000Yuxian
                Jinli Gas Co., Ltd
            
            
            PRC
            
            
            11/8/2005
            
            
            100
            
            
            100
            
            
            RMB
                9,500,000Zhangjiakou
                City Xiahuayuan Jinli Gas Co., Ltd.
            
            
            PRC
            
            
            9/30/2005
            
            
            100
            
            
            100
            
            
            RMB
                2,000,000Wuqiao
                Gas Co., Ltd
            
            
            PRC
            
            
            6/30/2004
            
            
            100
            
            
            95
            
            
            RMB
                2,000,000Jinzhou
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            7/19/2004
            
            
            100
            
            
            95
            
            
            RMB
                5,000,000Shenzhou
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            12/23/2005
            
            
            100
            
            
            95
            
            
            RMB
                3,000,000





F-9




Ningjin
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            12/3/2003
            
            
            100
            
            
            95
            
            
            RMB
                3,000,000Linzhang
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            7/6/2005
            
            
            100
            
            
            85
            
            
            RMB
                1,000,000Hengshui
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            12/20/2005
            
            
            100
            
            
            100
            
            
            RMB
                3,000,000Longyao
                Zhongran Weiye Gas Co., Ltd
            
            
            PRC
            
            
            10/13/2005
            
            
            100
            
            
            95
            
            
            RMB
                3,000,000Xingtang
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            2/18/2004
            
            
            100
            
            
            95
            
            
            RMB
                3,000,000Gucheng
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            3/21/2007
            
            
            100
            
            
            100
            
            
            RMB
                3,000,000Langfang
                Development Region WeiyeDangerous
                Goods Transportation Co., Ltd
            
            
            PRC
            
            
            3/22/2005
            
            
            100
            
            
            95
            
            
            RMB
                1,000,000Beijing
                Chenguang Gas Ltd.
            
            
            PRC
            
            
            10/30/2002
            
            
            100
            
            
            100
            
            
            RMB
                20,000,000Xinji
                Zhongchen Gas Co., Ltd
            
            
            PRC
            
            
            2/7/2007
            
            
            100
            
            
            100
            
            
            RMB
                3,000,000Shijiazhuang
                Chenguang Gas Co., Ltd
            
            
            PRC
            
            
            6/14/2007
            
            
            100
            
            
            100
            
            
            RMB
                2,000,000Luquan
                Chenguang Gas Co., Ltd
            
            
            PRC
            
            
            4/27/2007
            
            
            100
            
            
            100
            
            
            RMB
                2,000,000Chenan
                Chenguang Gas Co., Ltd
            
            
            PRC
            
            
            1/23/2007
            
            
            100
            
            
            100
            
            
            RMB
                1,500,000Nangong
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            6/25/2007
            
            
            100
            
            
            100
            
            
            RMB
                3,000,000Sishui
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            12/22/2004
            
            
            100
            
            
            95
            
            
            RMB
                3,000,000Guannan
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            6/19/2003
            
            
            100
            
            
            100
            
            
            RMB
                9,510,000Sixian
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            9/3/2007
            
            
            100
            
            
            100
            
            
            RMB
                3,000,000Baishan
                Weiye Gas Co., Ltd
            
            
            PRC
            
            
            7/13/1007
            
            
            100
            
            
            100
            
            
            RMB
                15,000,000




(e)Cash
                and Cash Equivalents





The
      Company considers all cash and other highly liquid investments with initial
      maturities of three months or less to be cash equivalents.




(f)Accounts
                and Other Receivable





Accounts
      and other receivable are recorded at net realizable value consisting of the
      carrying amount less an allowance for uncollectible accounts, as needed. The
      Company extends unsecured credit to customers in the normal course of business
      and does not accrue interest on trade accounts receivable.




F-10







(g)Advances
                to Suppliers





Advances
      to suppliers represent the cash paid in advance for purchasing raw materials.
      The advances to suppliers are interest free and unsecured.





(h)Investments
                in Equity Securities





Equity
      method of accounting was used to account for the investments in equity
      securities.





The
      consolidated statement of income includes the Group's share of the
      post-acquisition results of its associate for the year. In the consolidated
      balance sheet, investments in equity securities are stated at the Group's share
      of the net assets of the associates plus the premium paid less any discount
      on
      acquisition, less any identified impairment loss.





Goodwill
      arising on the acquisition of equity securities is not subject to
      amortization.





Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd are principally engaged in the
      investment in, and the operation and management of, gas pipeline infrastructure
      and the sale and distribution of piped gas in the People’s Republic of
      China.





NominalName of
            
            Place
            
            Form of
            
            
            
            Value ofAssociate
            
            of
            
            Business
            
            Registered
            
            Registered
            
            PrincipalCompany
            
            Registration
            
            Structure
            
            Capital
            
            Capital
            
            ActivitiesBeijing Zhongran
              Xiangke Oil Gas
              Technology Co.
                Ltd
            
            
            PRC
            
            
            Sino-foreign
                equity joint venture
            
            
            RMB
                20,000,000
            
            
            40
            
            
            Trading
                of
              natural
                gas and
              gas
                pipeline construction





Beijing
      Zhongran Xiangke Oil Gas Technology Co. Ltd is the Group's 40% owned joint
      Venture company and is principally engaged in sale of compressed natural gas
      to
      domestic households and industrial around sub-urban areas of Beijing and part
      of
      sub-urban areas in Hebei Province and Tianjin.





(i)Accounting
                for the Impairment of Long-Lived
                Assets





The
      long-lived assets held and used by the Company are reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      assets may not be recoverable. It is reasonably possible that these assets
      could
      become impaired as a result of technology or other industry changes.
      Determination of recoverability of assets to be held and used is by comparing
      the carrying amount of an asset to future net undiscounted cash flows to be
      generated by the assets.





If
      such
      assets are considered to be impaired, the impairment to be recognized is
      measured by the amount by which the carrying amount of the assets exceeds the
      fair value of the assets. Assets to be disposed of are reported at the lower
      of
      the carrying amount or fair value less costs to sell.


F-11





During
      the reporting periods, there was no impairment loss.





(j)Plant
                and Equipment





Plant
      and
      equipment, other than construction in progress, are stated at cost less
      depreciation and amortization and accumulated impairment loss.





Plant
      and
      equipment are carried at cost less accumulated depreciation. Depreciation is
      provided over their estimated useful lives, using the straight-line method.
      Estimated useful lives of the plant and equipment are as follows:





Gas
                Pipelines
            
            
            25
                yearsMotor
                Vehicles
            
            
            10
                yearsMachinery
                & Equipment
            
            
            20
                yearsBuildings
            
            
            25
                yearsLeasehold
                Improvements
            
            
            25
                yearsOffice
                Equipment
            
            
            8
                years





The
      cost
      and related accumulated depreciation of assets sold or otherwise retired are
      eliminated from the accounts and any gain or loss is included in the statement
      of income. The cost of maintenance and repairs is charged to income as incurred,
      whereas significant renewals and betterments are capitalized.




(k)Intangible
                Assets





Intangible
      assets, are stated at cost less amortization and accumulated impairment loss.
      Amortization is provided over their estimated useful lives, using the
      straight-line method. Estimated useful lives of the intangibles are as
      follows:





Land
                use rights
            
            
            40
                - 50 yearsFranchises
            
            
            30
                yearsOther
                intangibles
            
            
            3
                years




(l)Construction
                in progress





Construction
      in progress represents the cost of constructing pipelines and is stated at
      cost.
      Costs comprise direct and indirect incremental costs of acquisition or
      construction. Completed items are transferred from construction in progress
      to
      the gas pipelines of fixed assets when they are ready for their intended use.
      The major cost of construction relates to construction materials, direct labor
      wages and other overhead. Construction of pipeline, through which to distribute
      natural gas, is one of the Group’s principal businesses. The Group builds city
      main pipeline network and branch pipeline network to make gas connection to
      resident users, industrial, and commercial users, with the objective of
      generating revenue on gas connection and gas usage fees collected from these
      customers. As of December 31, 2007, the pipelines under construction include
      mainly the projects in Beijing. These projects, once completed, will
      significantly increase the gas supply capacity.


F-12




(m)Unearned
                Revenue





Unearned
      revenue represents prepayments by customers for gas purchases and advance
      payments on construction and installation of pipeline contracts. The Company
      records such prepayment as unearned revenue when the payments are
      received.





(n)Financial
                Instruments





The
      carrying amounts of all financial instruments approximate fair value. The
      carrying amounts of cash, accounts receivable, accounts payable and accrued
      liabilities approximate fair value due to the short-term nature of these items.
      The carrying amounts of borrowings approximate the fair value based on the
      Company’s expected borrowing rate for debt with similar remaining maturities and
      comparable risk.





(o)Foreign
                Currency Translation





The
      accompanying consolidated financial statements are presented in United States
      dollars. The functional currency of the Company is the Renminbi (RMB). The
      consolidated financial statements are translated into United States dollars
      from
      RMB at year-end exchange rates as to assets and liabilities and average exchange
      rates as to revenues and expenses. Capital accounts are translated at their
      historical exchange rates when the capital transactions occurred.




**12/31/2007**
            
            **12/31/2006**Years
                end RMB : US$ exchange rate
            
            
            7.3141
            
            
            7.8175Average
                yearly RMB : US$ exchange rate
            
            
            7.6172
            
            
            7.9819





The
      RMB
      is not freely convertible into foreign currency and all foreign exchange
      transactions must take place through authorized institutions. No representation
      is made that the RMB amounts could have been, or could be, converted into US$
      at
      the rates used in translation.




(p)Revenue
                Recognition





Revenue
      is recognized when services are rendered to customers when a formal arrangement
      exists, the price is fixed or determinable, the delivery is completed, no other
      significant obligations of the Company exist and collectability is reasonably
      assured. Payments received before all of the relevant criteria for revenue
      recognition are satisfied are recorded as unearned revenue.





Net
      sales
      consist of gas and connection fee revenue. Cost of sales include gas and
      connection cost.





Gas
      connection revenue is recognized when the outcome of a contract can be estimated
      reliably and the stage of completion at the balance sheet date can be measured
      reliably.





Sales
      of
      natural gas are recognized when goods are delivered and title has
      passed.




F-13




(q)Investment
                Income





Investment
      income represents the Group’s share of post-acquisition results of its
      investment in equity securities for the year.





(r)Income
                Taxes





Deferred
      income taxes are recognized for the tax consequences in future years of
      differences between the tax bases of assets and liabilities and their financial
      reporting amounts at each period end based on enacted tax laws and statutory
      tax
      rates applicable to the periods in which the differences are expected to affect
      taxable income. Valuation allowances are established when necessary to reduce
      deferred tax assets to the amount expected to be realized. As of December 31,
      2007, there was no significant book to tax differences.





Pursuant
      to the tax laws of PRC, general enterprises are subject to income tax at an
      effective rate of 33%. Beijing Gas is in the natural gas industry whose
      development is encouraged by the government. According to the income tax
      regulation, any company engaged in the natural gas industry enjoys a favorable
      tax rate. Also, Beijing Gas is exempt from corporate income tax for its first
      two years and is then entitled to a 50% tax reduction for the succeeding three
      years. The Company’s first profitable tax year was 2003. Accordingly, the
      Company’s income is subject to a reduced tax rate of 7.5%. From 2008 onwards,
      the Company’s income is subject to a reduced tax rate of 9%. Subsidiaries of
      Beijing Gas are subject to the effective rate of 33%.





(s)Advertising





The
      Group
      expensed all advertising costs as incurred





(t)Concentration
                of Credit Risk





Concentration
      of credit risk is limited to accounts receivable and is subject to the financial
      conditions of major customers. The Company does not require collateral or other
      security to support accounts receivable. The Company conducts periodic reviews
      of its clients’ financial condition and customers’ payment practices to minimize
      collection risk on accounts receivable.





(u)Retirement
                Benefits





Retirement
      benefits in the form of contributions under defined contribution retirement
      plans to the relevant authorities are charged to the statements of income as
      incurred.





(v)Statutory
                Reserves





As
      stipulated by the Company Law of the People's Republic of China (PRC) as
      applicable to Chinese companies with foreign ownership, net income after
      taxation can only be distributed as dividends after appropriation has been
      made
      for the following:




F-14




i.
            Making
                up cumulative prior years' losses, if
                any;




ii.
            Allocations
                to the "Statutory surplus reserve" of at least 10% of income after
                tax, as
                determined under PRC accounting rules and regulations, until the
                fund
                amounts to 50% of the Company's registered
                capital;




iii.
            Allocations
                to the discretionary surplus reserve, if approved in the shareholders'
                general meeting.








(w)Statement
                of Cash Flows





In
      accordance with Statement of SFAS 95, “Statement of Cash Flows”, cash flows from
      the Company’s operations is calculated based upon the local currencies. As a
      result, amounts related to assets and liabilities reported on the statement
      of
      cash flows will not necessarily agree with changes in the corresponding balances
      on the balance sheet.




(x)Comprehensive
                Income





Comprehensive
      income is defined to include all changes in equity except those resulting from
      investments by owners and distributions to owners. Among other disclosures,
      all
      items that are required to be recognized under current accounting standards
      as
      components of comprehensive income are required to be reported in a financial
      statement that is presented with the same prominence as other consolidated
      financial statements. The Company’s current component of other comprehensive
      income is the foreign currency translation adjustment.





(y)Recent
                Accounting Pronouncements





In
      July
      2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
      Interpretation of FASB Statement No. 109, which clarifies the accounting for
      uncertainty in tax positions. This Interpretation requires that the Company
      recognizes in its consolidated financial statements the impact of a tax position
      if that position is more likely than not of being sustained on audit, based
      on
      the technical merits of the position. The provisions of FIN 48 are effective
      for
      the Company on January 1, 2007, with the cumulative effect of the change in
      accounting principle, if any, recorded as an adjustment to opening retained
      earnings.




In
      September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
      fair value, establishes a framework for measuring fair value in generally
      accepted accounting principles, and expands disclosures about fair value
      measurements. SFAS 157 applies under other accounting pronouncements that
      require or permit fair value measurements, where fair value is the relevant
      measurement attribute. The standard does not require any new fair value
      measurements. SFAS 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007, and interim periods within those fiscal
      years.





In
      September 2006, the SEC issued SAB No. 108, which provides guidance on the
      process of quantifying financial statement misstatements. In SAB No. 108, the
      SEC staff establishes an approach that requires quantification of financial
      statement errors, under both the iron-curtain and the roll-over methods, based
      on the effects of the error on each of the Company’s financial statements and
      the related financial statement disclosures. SAB No.108 is generally effective
      for annual financial statements in the first fiscal year ending after November
      15, 2006. The transition provisions of SAB No. 108 permits existing public
      companies to record the cumulative effect in the first year ending after
      November 15, 2006 by recording correcting adjustments to the carrying values
      of
      assets and liabilities as of the beginning of that year with the offsetting
      adjustment recorded to the opening balance of retained earnings.




F-15




In
      February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
      Assets and Financial Liabilities Including an Amendment of FASB Statement No.
      115 (" SFAS 159"). SFAS 159 permits entities to choose to measure many financial
      instruments and certain other items at fair values. SFAS 159 is effective for
      fiscal years after November 15, 2007. The Company is currently evaluating the
      impact of adopting SFAS 159 on our financial statements.





In
      December 2007, the Financial Accounting Standards Board issued FASB Statement
      No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R
      provides additional guidance on improving the relevance, representational
      faithfulness, and comparability of the financial information that a reporting
      entity provides in its financial reports about a business combination and its
      effects. This Statement applies prospectively to business combinations for
      which the acquisition date is on or after the beginning of the first annual
      reporting period beginning on or after December 15, 2008. The Company
      believes there will be no material impact on its financial statements upon
      adoption of this standard.





In
      December 2007, the Financial Accounting Standards Board issued FASB Statement
      No. 160, *Noncontrolling Interests in Consolidated Financial Statements—an amendment of
      ARB No. 51* (“SFAS
      160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting
      standards for the noncontrolling interest in a subsidiary and for the
      deconsolidation of a subsidiary. This Statement is effective for fiscal
      years and interim periods within those fiscal years, beginning on or after
      December 15, 2008. The Company believes there will be no material impact on
      its financial statements upon adoption of this standard.





The
      management of the Company does not anticipate that the adoption of these six
      standards will have a material impact on these consolidated financial
      statements.





(Z)Earnings
                Per Share





The
      Company reports earnings per share in accordance with SFAS No. 128, “Earnings
      per Share.” Basic earnings per share are computed by dividing income available
      to common shareholders by the weighted average number of common shares
      available. Diluted earnings per share is computed using the treasury stock
      method whereby the denominator is increased by the net dilution on the exercise
      of the warrants and if the additional common shares were dilutive.




F-16




**3.**
            **RESTRICTED
                CASH**




Restricted
      Cash represents compensating balances held at banks to partially secure banking
      facilities in the form of loans and notes payable. The imposed restrictions
      dictate that funds cannot be withdrawn when there are outstanding loans and
      notes payable, and the funds are only allowed to be used to settle bank
      indebtedness. The funds deposited as compensating balances are interest bearing.
      The amount of cash restricted varies based on the Bank’s credit policy at the
      time that the Company requests for increase or extension of credit
      facilities.





**4.**
            **ACCOUNTS
                RECEIVABLE**




For
      natural gas sales, it is due when the gas is sold. Normally, most of them are
      settled by prepayments from the customers.





In
      general for construction projects, deposits of 30% of total contract sum are
      received from client when the project commences. Second payment of 30% is
      received after the construction is completed for around 6 months. The final
      sum
      of the remaining portion normally acts as retention money for quality warrantee
      to the developer. The retention money would be received by the company after
      the
      1 year warrantee period.





The
      phrase "receivables are due within one year of aging" means the receivable
      that
      are within one year of aging.





The
      "amounts are not due within one year" are mostly retention money from
      construction sales that are based on contracts. The continued demand from the
      natural gas sales from them also help assure the amount could be collected.
      No
      experience of wholly-unsettled accounts receivable in the year December 31,
      2007
      and 2006.





Trade
      accounts receivable are recorded at the invoiced amount, net of allowances
      for
      doubtful accounts and sales returns. The allowance for doubtful accounts is
      the
      Company’s best estimate of the amount of probable credit losses in the Company’s
      existing accounts receivable. The Company determines the allowance based on
      historical write-off experience, customer specific facts and economic
      conditions. Bad debt expense is included in the general and administrative
      expenses.





Outstanding
      account balances are reviewed individually for collectibles. Account balances
      are charged off against the allowance after all means of collection have been
      exhausted and the potential for recovery is considered remote. To date, the
      Company has not charged off any balances as it has yet to exhaust all means
      of
      collection. The Company does not have any off-balance-sheet credit exposure
      to
      its customers, except for outstanding notes receivable discounted with banks
      that are subject to recourse for non-payment.





The
      credit and billing policy is that, for the residential customer, we collect
      prepayment from customers; for the industrial customers, we settle the payment
      based on the contract terms signed, from 10 days to one month; for the
      construction business, we collect the payment from customer based on the
      percentage of the construction progress. The risk that business faces from
      inability to collect account is Operation risk in industrial
      customers.





Accounts
                Receivable
            
            2007
            
            2006Gross
                accounts receivable
            
            $
            7,352,013
            
            $
            6,567,578Allowance
                for bad debt
            
            
            (36,760
            )
            
            (32,838
            )Net
                accounts receivable
            
            $
            7,315,253
            
            $
            6,534,740




Allowance
                for Bad Debt
            
            
            2007
            
            
            2006Beginning
                balance
            
            $
            32,838
            
            $
            29,042Addition
            
            
            26,909
            
            
            24,125Less
            
            
            (22,987
            )
            
            (20,329
            )Ending
                balance
            
            $
            36,760
            
            $
            32,838




Accounts
                Receivable Aging Report
            
            2007
            
            200630
                Days
            
            $
            5,557,172
            
            $
            5,481,05130-60
                Days
            
            
            1,212,413
            
            
            14,67260-90
                Days
            
            
            8,747
            
            
            333,12390-180
                Days
            
            
            -
            
            
            -180-360
                Days
            
            
            27,489
            
            
            42,612.42>360
                Days
            
            
            509,433
            
            
            663,282Total
            
            $
            7,315,254
            
            $
            6,534,740




F-17




The
      followings are the largest ten accounts receivable as of December 31
      2007.





Baishan
                Jiehe Development & Construction Co., Ltd
            
            $
            200,844Shuqian
                Mingwei Development & Construction Co., Ltd
            
            
            241,998Peixian
                Jiannan Real Estate Development Co., Ltd
            
            
            313,367Sihong
                Jinwan Construction Co., Ltd
            
            
            316,101Xiuzhou
                Shenyuan Real Eastate Development Co., Ltd
            
            
            337,038Guannan
                Construction Co., Ltd
            
            
            345,360Lianyuangan
                Baoli Development Co., Ltd
            
            
            357,665Jianshu
                Province Farms
            
            
            421,405Huabei
                Oil Management & Machine Co., Ltd
            
            
            555,365Hebei
                Zhonggang Steel Co., Ltd
            
            
            592,135$
            3,681,282




**5.**
            **INVESTMENTS**




**12/31/2007**
            
            **12/31/2006**Beijing
                Zhongran Xiangke Oil Gas Technology Co. Ltd
            
            $
            3,163,751
            
            $
            2,939,029Other
                project
            
            
            843,559
            
            
            --As
                of December 31
            
            $
            4,007,310
            
            $
            2,939,029




The
      following is the Balance Sheets of Beijing Zhongran Xiangke Oil Gas Technology
      Co., Ltd. as of December 31, 2007 and 2006, and the related Statements of Income
      for the years then ended.





**Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd**


**Balance
      Sheet**


**As
      of December 31, 2007 and 2006**




Assets
            
            
            **2007**
            ****
            ****
            **2006**Current
                Assets
            
            $
            4,351,320
            
            $
            4,583,010Non-Current
                Assets
            
            
            13,736,685
            
            
            11,320,804Total
                Assets
            
            
            18,088,005
            
            
            15,903,814LiabilitiesCurrent
                Liabilities
            
            
            7,794,262
            
            
            6,852,718Total
                Liabilities
            
            
            7,794,262
            
            
            6,852,718Net
                Assets
            
            $
            10,293,742
            
            $
            9,051,096





**Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd**


**Statement
      of Income**


**For
      the years ended December 31, 2007 and 2006**





**2007**
            
            **2006**Sales
                revenue
            
            $
            5,819,210
            
            $
            6,795,876Cost
                of revenue
            
            
            (3,287,090
            )
            
            3,984,152Gross
                profit
            
            
            2,532,120
            
            
            2,811,724Operating
                expenses
            
            
            1,811,203
            
            
            1,518,622Other
                income/(expense)
            
            
            (110,634
            )
            
            (192,810
            )Earnings
                before taxation
            
            
            1,319,164
            
            
            1,100,292Income
                tax
            
            
            (91,543
            )
            
            (82,522
            )Net
                income
            
            $
            1,227,622
            
            $
            1,017,770




**6.**
            **PLANT
                AND EQUIPMENT, NET**





Plant
      and
      Equipment consist of the following as of December 31, 2007 and
      2006:





**12/31/2007**
            
            **12/31/2006**At
                CostGas
                Pipelines
            
            $
            18,885,734
            
            $
            8,255,231Motor
                Vehicles
            
            
            4,874,685
            
            
            2,204,621Machinery
                & Equipment
            
            
            885,997
            
            
            273,943Buildings
            
            
            1,405,638
            
            
            89,799Leasehold
                Improvements
            
            
            68,942
            
            
            47,543Office
                Equipment
            
            
            105,336
            
            
            67,77426,226,335
            
            
            10,938,911Less:
                Accumulated depreciation
            
            
            (1,653,771
            )
            
            (330,381
            )$
            24,572,565
            
            $
            10,608,530




F-18




Depreciation
      and amortization expense is included in the consolidated statements of income
      and comprehensive income for the year December 31, 2007 and 2006 is as
      follows:





2007
            
            2006Cost
                of revenues
            
            $
            728,829
            
            $
            87,155Selling
                and marketing expenses
            
            
            156,178
            
            
            18,645General
                and administrative expenses
            
            
            416,473
            
            
            49,574$
            1,301,480
            
            $
            155,374








**7.**
            **INTANGIBLE
                ASSETS**





Intangible
      assets consist of the following as of December 31, 2007:





12/31/2007
            
            12/31/2006At
                CostLand
                use rights
            
            $
            452,345
            
            $
            112,565Franchises
            
            
            359,464
            
            
            336,318Goodwill
            
            
            1,562,202Other
            
            
            9,563
            
            
            8,9472,383,574
            
            
            457,830Less:
                Accumulated amortization
            
            
            355,324
            
            
            -$
            2,028,250
            
            $
            457,830




The
      Group
      operates as a local natural gas distributor in a city or county, known as an
      operation location, under an exclusive franchise agreement between the Group
      and
      the local government or entities in charge of gas utility. Franchises are the
      rights to develop sites in Anping and Jinzhou in China. They are stated at
      cost
      less accumulated depreciation.





**8.**
            **SHORT-TERM
                BANK LOANS**





Short-term
      bank loans are as follows:





2007
            
            2006Loans
                from Shen Zhen Development Bank Co., Ltd,
            
            
            -
            
            $
            2,430,445interest
                rate at 5.022% per annumLoans
                from China Renmin Bank Co.,Ltd.Interest
                rate at 7.2270% per annum plus additional 10% fluctuation market
                rate
            
            $
            2,734,444
            
            
            -




Interest
      expense for the short term bank loans was $55,405 and $9,522 for the years
      ended December 31, 2007 and 2006. Banking facility is secured by the
      Directors’ mortgage of real property.




F-19







**9.**
            **OTHER
                PAYABLES**





Other
      payables at December 31, 2007 consist of the following:





12/31/2007
            
            12/31/2006Employees’
                welfare payables
            
            $
            176,236
            
            $
            56,584Amount
                due to employees
            
            
            150,711
            
            
            11,360Tax
                payable
            
            
            922,620
            
            
            1,089,804Other
                Payable
            
            
            9,134,091
            
            
            632,752Total
            
            $
            10,383,657
            
            $
            1,790,500





All
      the
      amounts due to employees are unsecured, interest free, and have no fixed
      repayment terms.




**10.**
            **CAPITAL
                STOCK**





The
      authorized capital stock consists of (i) 250,000,000 shares of common stock,
      par
      value $0.001 per share, of which there are 25,282,380 shares issued and
      outstanding, and (ii) 100,000,000 shares of preferred stock, par value $0.001
      per share. The preferred stock consists of (i) series A convertible preferred
      stock, of which 20,000,000 shares have been authorized and 275,111 shares are
      issued and outstanding; and (ii) series B convertible preferred stock, of which
      5,000,000 shares have been authorized and 4,971,859 shares are issued and
      outstanding.





The
      following is a summary of the material terms of its capital stock. This summary
      is subject to and qualified in its entirety by its Articles of Incorporation,
      as
      amended and corrected, certificates of designations for its series A and series
      B convertible preferred stock, its by-laws and by the applicable provisions
      of
      Utah law.





Common
      Stock





The
      Company is authorized to issue 250,000,000 shares of common stock, with a par
      value of $0.001. There are 25,282,380 shares of common stock issued and
      outstanding as of December 31, 2007. All shares of common stock have one vote
      per share on all matters including election of directors, without provision
      for
      cumulative voting. The common stock is not redeemable and has no conversion
      or
      preemptive rights. The common stock currently outstanding is validly issued,
      fully paid and non-assessable. In the event of liquidation of the company,
      the
      holders of common stock will share equally in any balance of the company's
      assets available for distribution to them after satisfaction of creditors and
      preferred shareholders, if any. The holders of common stock are entitled to
      equal dividends and distributions per share with respect to the common stock
      when, as and if, declared by the board of directors from funds legally
      available.




F-20




Preferred
      Stock





In
      addition to the 250,000,000 shares of common stock, The Company is authorized
      to
      issue 100,000,000 shares of preferred stock, with a par value of $0.001 per
      share. Shares of the preferred stock may be issued from time to time in one
      or
      more classes or series, each of which class or series shall have such
      distinctive designation or title as shall be fixed by the board of directors
      prior to the issuance.





On
      August
      30, 2006, the Company’s board of directors designated 20,000,000 shares of its
      authorized $0.001 par value per share preferred stock as series A convertible
      preferred stock and 5,000,000 shares of its preferred stock as series B
      convertible preferred stock. On August 31, 2006, the Company filed certificates
      of designations for the series A and series B convertible preferred stock with
      the Office of the Secretary of State of Utah. On September 6, 2006, the board
      of
      directors amended the designations of the Series B convertible preferred stock
      and the Company filed an amended certificate of designations for the Series
      B
      convertible preferred stock with the Office of the Secretary of State of Utah.
      The board of directors created the series A convertible preferred stock to
      allow
      the Company to consummate the share exchange transaction with the Gas (BVI)
      Shareholders and the series B convertible preferred stock in connection with
      its
      private financing transactions, although the Company does not have sufficient
      unissued authorized common stock to allow for a complete conversion. Each of
      the
      shares of series A convertible preferred stock was automatically converted
      into
      one share of its common stock upon the effectiveness of its reverse stock-split
      on November 17, 2006. Therefore, as of December 31, 2006, the Company has no
      shares of series A convertible preferred stock issued and
      outstanding.





Conversion





The
      Company issued 14,361,646 of its common shares upon the automatic conversion
      of
      its series A convertible preferred shares after the 304.44-for-1 reverse
      stock-split on November 17, 2006. The Company no longer has any series A
      convertible preferred shares outstanding.





Each
      share of the series B convertible preferred stock will become convertible into
      common stock, at the option of its holder after the 304.44-for-1 reverse
      stock-split, based on the then applicable conversion rate, which is initially
      one share of series B convertible preferred stock for one share of common
      stock.


F-21


**Total
      Capitalization**





The
      Following table depicts an analysis of total capitalization for the issuance
      of
      Preferred Stock A, Preferred Stock B, Common Stock, and the related additional
      Paid in Capital as of December 31, 2007:





**Preferred Stock A**
            
            **Preferred Stock B**
            
            **Common Stock****Name of Shareholder**
            
            **Number**
              **of** **Shares**
              **Outstanding**
            
            **Capital**
            
            **Number**
              **of** **Shares**
              **Outstanding**
            
            **Capital**
            
            **Number**
              **of** **Shares**
              **Outstanding**
            
            **Capital**
            
            **Additional**
              **Paid in** **Capital**
            
            **% of**
              **Equity**
              **Holdings**Private Investor
            
            
            275,111
            
            
            275
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,210,213
            
            
            0.90
            %Investor
                Relations firm
            
            
            -
            
            
            -
            
            
            4,971,859
            
            
            4,972
            
            
            -
            
            
            -
            
            
            6,994,270
            
            
            16.29
            %Management
                / Insider
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            12,653,661
            
            
            12,654
            
            
            4,252,959
            
            
            41.45
            %Investor
                - 1st Round Raising
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,628,722
            
            
            5,629
            
            
            2,997,371
            
            
            18.44
            %*Less
                : Cost of Stock Issurance*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (412,241
            )
            
            -Investor
                - 2nd Round Raising
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6,999,997
            
            
            7,000
            
            
            15,743,000
            
            
            22.93
            %*Less
                : Cost of Stock Issurance*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,957,133
            )
            
            -Beneficial
                Conversion Feature
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6,418,864
            
            
            -275,111
            
            
            275
            
            
            4,971,859
            
            
            4,972
            
            
            25,282,380
            
            
            25,283
            
            
            35,247,303
            
            
            100.00
            %





**11.**
            **INCOME
                TAX**





In
      accordance with the relevant tax laws and regulations of PRC, the corporation
      income tax rate is 33%. However, in accordance with the relevant taxation laws
      in the PRC, the Group is eligible for tax concessions and was exempted from
      part
      of the PRC income taxes for the year.





Effective
      January 1, 2008, PRC government implements a new 25% tax rate for all
      enterprises regardless of whether domestic or foreign enterprise without any
      tax
      holiday, which is defined as "two-year exemption followed by three-year half
      exemption" hitherto enjoyed by tax payers. As a result of the new tax law of
      a
      standard 25% tax rate, tax holidays terminated as of December 31, 2007. However,
      PRC government has established a set of transition rules to allow enterprises
      that already started tax holidays before January 1, 2008, to continue enjoying
      the tax holidays until being expired.




The
      following table accounts for the differences between the actual tax provision
      and the amounts obtained by applying the applicable PRC corporation income
      tax
      rate of 33% to income before taxes for the years ended December 31.





2007
            
            2006Income
                before taxation
            
            $
            8,228,032
            
            $
            5,496,573Provision
                for income taxes at PRC income tax rate
            
            
            2,719,157
            
            
            1,813,869Effect
                of tax exemption granted to the Company
            
            
            (2,186,657
            )
            
            (1,390,585
            )Income
                tax
            
            $
            531,612
            
            $
            423,284


F-22





**12.**
            **SEGMENT
                INFORMATION**





The
      Company has contracted with customers usually in two revenue segments
      altogether, one is for the construction and installation of gas facilities
      and
      another one is the subsequent sales of gas to that customers through the gas
      facilities the Company constructs. However, the respective gas facilities
      contracts and gas supply contracts have separately provided for the basis of
      revenue recognition and distinctive from each other for the relevant
      cost-and-revenue to be incurred and hence separate calculation and subsequent
      payment of fees for respective business without any interdependence on each
      other in this respect.




For
      management purposes, the company is currently organized into two major operating
      divisions - gas pipeline construction (installation of gas facilities) and
      sales
      of piped gas. These principal operating activities are the basis on which the
      Company reports its primary segment information.





2007
      Statement of Income (Segment Detail)





Gas Distribution
            
            Gas pipeline
              Installation
            
            Others
            
            TotalSales Revenue
            
            $
            7,294,608
            
            $
            12,973,148
            
            $
            -
            
            $
            20,267,756Cost
                of Revenue
            
            
            (6,374,365
            )
            
            (3,125,387
            )
            
            -
            
            
            9,499,752Gross
                Profit
            
            
            920,243
            
            
            9,847,761
            
            
            -
            
            
            10,768,004Operating
                Expenses
            
            
            (209,418
            )
            
            (2,241,032
            )
            
            (264,769
            )
            
            (2,715,219
            )Other
                Income
            
            
            4,080
            
            
            43,665
            
            
            128,391
            
            
            187,086Earnings
                from continued operation
            
            
            714,905
            
            
            7,650,394
            
            
            (136,378
            )
            
            8,228,032Income
                tax
            
            
            (45,604
            )
            
            (486,896
            )
            
            -
            
            
            (531,612
            )Gain
                from discontinued operation, net of fax
            
            
            
            
            
            
            
            
            10,950
            
            
            10,950Net
                income
            
            $
            669,301
            
            $
            7,163,498
            
            $
            (125,428
            )
            $
            7,707,370





2007
      Balance Sheet (Segment Detail)





Gas Distribution
            
            Gas pipeline
              Installation
            
            Others
            
            TotalAssetsCurrent
                Assets
            
            $
            11,509,765
            
            $
            3,814,583
            
            $
            7,866,957
            
            $
            23,191,305Non-Current
                Assets
            
            
            10,606,803
            
            
            31,558,142
            
            
            -
            
            
            42,164,945Total
                Assets
            
            
            22,116,568
            
            
            35,372,725
            
            
            7,866,957
            
            
            65,356,250LiabilitiesCurrent
                Liabilities
            
            
            1,228,727
            
            
            13,149,074
            
            
            131,843
            
            
            14,509,644Total
                Liabilities
            
            
            1,228,727
            
            
            13,149,074
            
            
            134.843
            
            
            14,509,644Net
                Assets
            
            $
            20,887,841
            
            $
            22,223,651
            
            $
            7,735,114
            
            $
            50,846,606


F-23


2006
      Statement of Income (Segment Detail)




Gas Distribution
            
            Gas pipeline
              Installation
            
            Others
            
            TotalSales
                Revenue
            
            $
            3,912,502
            
            $
            6,958,216
            
            
            -
            
            $
            10,870,718Cost
                of Revenue
            
            
            (2,945,132
            )
            
            (1,444,010
            )
            
            -
            
            
            (4,389,142
            )Gross
                Profit
            
            
            967,370
            
            
            5,514,206
            
            
            -
            
            
            6,481,576Operating
                Expenses
            
            
            (96,534
            )
            
            (1,033,044
            )
            
            (122,050
            )
            
            (1,251,628
            )Other
                Income
            
            
            7,831
            
            
            83,811
            
            
            174,983
            
            
            266,625Earnings
                before taxation
            
            
            878,667
            
            
            4,564,973
            
            
            145,401
            
            
            5,496,573Income
                tax
            
            
            (36,250
            )
            
            (387,034
            )
            
            -
            
            
            (423,284
            )Net
                income
            
            $
            842,417
            
            $
            4,177,939
            
            $
            145,401
            
            $
            5,165,757





2006
      Balance Sheet (Segment Detail)





Gas Distribution
            
            Gas pipeline
              Installation
            
            Others
            
            TotalAssetsCurrent
                Assets
            
            $
            6,236,877
            
            $
            3,795,902
            
            $
            5,216,552
            
            $
            15,249,331Non-Current
                Assets
            
            
            4,687,342
            
            
            13,946,123
            
            
            -
            
            
            18,633,465Total
                Assets
            
            
            10,924,219
            
            
            17,742,025
            
            
            5,216,552
            
            
            33,882,796LiabilitiesCurrent
                Liabilities
            
            
            722,382
            
            
            7,730,484
            
            
            115,617
            
            
            8,568,483Total
                Liabilities
            
            
            722,382
            
            
            7,730,484
            
            
            115,617
            
            
            8,568,483Net
                Assets
            
            $
            10,201,837
            
            $
            10,011,541
            
            $
            5,100,935
            
            $
            25,314,313


F-24


The
      Company's operations are located in the PRC. All revenue is from customers
      in
      the PRC. All of the Company’s assets are located in the PRC. Sales of piped gas
      and gas pipeline construction are carried out in the PRC. Accordingly, no
      analysis of the Company's sales and assets by geographical market is
      presented.




No
      other
      measures of segment profit or loss and assets have been provided or reviewed
      by
      the company's chief operating decision maker.





**13.**
            **COMMITMENTS
                UNDER OPERATING LEASES**





At
      December 31, 2007, the Group had commitment for future minimum lease payments
      under non-cancelable operating leases in respect of office rented premises
      which
      fall due as follows:





2007
            
            2006Land
                and BuildingsNot
                later than one year
            
            $
            45,934
            
            $
            61,401Later
                than one year and not later than five years
            
            
            228,079
            
            
            245,603After
                five years
            
            
            500,067
            
            
            521,906$
            774,080
            
            $
            828,910





**14.**
            **RELATED
                PARTIES TRANSACTIONS**





The
      following material transactions with related parties during the years were
      in
      the opinion of the directors, carried out in the ordinary course of business
      and
      on normal commercial terms:





Sales
      to
      Beijing Zhongran Xiangke Oil Gas Technology Co. Ltd (Zhongran Xiangke), an
      investee for which the equity method is used, for the years 2007 and 2006 were
      $85,951 and $334,326 respectively. The amounts receivable from Zhongran Xiangke
      for the years 2007 and 2006 were $16,741 and $0 respectively. Also, included
      in
      the other payables are payables to Zhongran Xiangke for the years 2007 and
      2006
      were $141,303 and $101,592 respectively.





Sales
      to
      Beijing Zhongyou Xiangke Oil Gas Technology Co. Ltd (Zhongyou Xiangke), an
      investee of Zhongran Xiangke, for the years 2007 and 2006 were $ 0 and $ 0
      respectively. The amounts receivable from Zhongyou Xiangke for the years 2007
      and 2006 were $ 0 and $2,130 respectively.


F-25





**15.**
            **DISCONTINUED
                OPERATION SEGMENT**




According
      to the agreement of Board of Directors Minute of Sino Gas International
      Holdings, Inc., the Company decides to discontinue the operation of Pegasus
      Tel,
      Inc., a BVI company of Sino Gas International Holdings, Inc. at the end of
      fiscal year 2007.




Pegasus
      Tel, Inc.


Statements
      of Income





12/31/2007
            
            12/31/2006Revenues
            
            $
            10,059
            
            $
            2,138Cost
                of Sales
            
            
            (5,904
            )
            
            (6,601
            )Gross
                Profit
            
            
            4,155
            
            
            4,463Operating
                Expenses
            
            
            66,459
            
            
            11,973Other
                Expense Interest
            
            
            (3,347
            )
            
            (95
            )Earnings
                before Tax
            
            
            (65,651
            )
            
            (16,531
            )Tax
            
            
            (60
            )
            
            (65
            )Net
                Income
            
            $
            (65,711
            )
            $
            (16,596
            )Earnings
                per share
            
            $
            (0.01
            )
            
            (0.00
            )Weighted
                Average Shares Outstanding
            
            
            5,100,000
            
            
            5,100,000





Pegasus
      Tel, Inc.


Balance
      Sheet





12/31/2007
            
            12/31/2006AssetsCurrent
                Assets
            
            $
            2,336
            
            $
            445Non
                Current Assets
            
            
            -
            
            
            509Total
                Assets
            
            
            2,336
            
            
            954Current
                Liabilities
            
            
            86,047
            
            
            18,954Total
                Liabilities
            
            
            86,047
            
            
            18,954Net
                Assets
            
            
            (83,711
            )
            
            (18,000
            )Total
                Liabilities & Net Assets
            
            $
            2,336
            
            $
            954





The
      Company engaged the disposition agreement with China Zhongshi Gas Co., Ltd
      of
      selling its subsidiary Anping Weiye Gas Co., Ltd. for RMB 3,300,000
      (approximately $433,230) in the June 2007. The following is the balance sheet
      and statement of income of Anping Weiye Gas Co., Ltd. provided by the client,
      as
      of and for the year ended December 31, 2006


F-26





Anping
      Weiye Gas Co., Ltd.


As
      of and
      for the year ended December 31, 2006





Balance
                SheetAssetsCurrent
                Assets
            
            $
            646,510Non-Current
                Assets
            
            
            947Total
                Assets
            
            
            647,457Liabilities
            
            
            -Current
                Liabilities
            
            
            7,813Total
                Liabilities
            
            
            7,813Net
                Assets
            
            $
            639,644





Statement
                of IncomeSales
                revenue
            
            $
            -Cost
                of sales
            
            
            -Gross
                Profit
            
            
            -Operating
                expense
            
            
            -Other
                expense
            
            
            (21
            )Income
                before tax
            
            
            (21
            )Income
                tax
            
            
            -Net
                Income
            
            $
            (21
            )





**16.
      ACQUISITIONS**





The
      Company had two acquisitions during the year 2007, the purchase of (1) Beijing
      Chenguang Gas, Ltd. and (2) Guannan Weiye Gas Co., Ltd.





On
      January 15, 2007, Beijing Gas entered into a stock transfer agreement with
      the
      shareholders of Beijing Chenguang Gas Ltd., Co., a limited liability company
      organized under the laws of the PRC, under which Beijing Gas will acquire all
      the capital stock of Beijing Chenguang for a purchase price of $3.35 million
      in
      cash (approximately RMB 26 million). Upon consummation of the transactions
      contemplated by that agreement, Beijing Chenguang will become a whollyowned
      subsidiary of Beijing Gas. Beijing Chenguang is primarily engaged in the
      development, transfer and licensing of technologies used in natural gas
      purification, compression and transportation, as well as the installation of
      natural gas equipment and the supply of natural gas.





On
      June
      26, 2007 the Company, through its Beijing Gas subsidiary, acquired Guannan
      Weiye
      Gas Co., Ltd (“Guannan”) for $918,972 (RMB 7,000,000), at which point the
      Guannan became a wholly owned subsidiary of the Company. The acquisition was
      paid entirely in cash. Subsequently, the Company made an additional capital
      contribution, in the form of cash in the amount of $328,204 (RMB 2,510,000)
      to
      the Guannan, to increase its PRC registered capital to $1,247,177 (RMB
      9,510,000).





The
      following is a retroactive restatement of the proforma consolidated Balance
      Sheets and Statements of Income as of and for the fiscal years ended December
      31, 2007 and 2006. The retroactive restatement is based on the assumption that
      the acquisitions were made at the beginning of 2006 for the purpose of trading
      and comparative analysis.





2007
            
            2006Total
            
            Zhongran
            
            Chengguang
            
            Guangnan
            
            TotalAssetsCurrent
                Assets
            
            $
            23,191,305
            
            $
            15,249,331
            
            $
            584,277
            
            $
            12,811
            
            $
            15,846,419Non-Current
                Assets
            
            
            42,164,945
            
            
            18,633,465
            
            
            5,489,774
            
            
            622,793.43
            
            
            24,746,032Total
                Assets
            
            
            65,356,250
            
            
            33,882,796
            
            
            6,074,051
            
            
            635,604.48
            
            
            40,592,452LiabilitiesCurrent
                Liabilities
            
            
            16,365,964
            
            
            8,568,483
            
            
            2,104,579
            
            
            320,268.30
            
            
            10,993,330Non-Current
                Liabilities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                Liabilities
            
            
            16,365,964
            
            
            8,568,483
            
            
            2,104,579
            
            
            320,268.30
            
            
            10,993,330Net
                Assets
            
            $
            48,990,286
            
            $
            25,314,313
            
            $
            3,969,473
            
            $
            315,336
            
            $
            29,599,122





2007
            
            6/30/2006Zhongran
            
            Guannan
            
            TotalSales
                revenue
            
            $
            20,267,756
            
            $
            68,551
            
            $
            20,336,399Cost
                of revenue
            
            
            (9,499,752
            )
            
            40,367
            
            
            (9,540,119
            )Gross
                profit
            
            
            10,768,004
            
            
            28,184
            
            
            10,796,188Operating
                expenses
            
            
            (2,715,219
            )
            
            (52,630
            )
            
            (2,767,849
            )Other
                income/(expense)
            
            
            187,086
            
            
            (1,199
            )
            
            185,877Earnings
                before tax
            
            
            8,239,871
            
            
            (25,645
            )
            
            8,214,226Income
                tax
            
            
            (532,500
            )
            
            (1,131
            )
            
            (533,631
            )Net
                income
            
            $
            7,707,371
            
            $
            (26,776
            )
            $
            7,680,595


F-27





2006Zhongran
            
            Chengguan
            
            Guannan
            
            TotalSales
                revenue
            
            $
            10,870,718
            
            $
            4,084,700
            
            $
            16,981
            
            $
            14,972,399Cost
                of revenue
            
            
            (4,389,142
            )
            
            (2,849,441
            )
            
            (10,576
            )
            
            (7,249,158
            )Gross
                profit
            
            
            6,481,576
            
            
            1,235,260
            
            
            6,405
            
            
            7,723,241Operating
                expenses
            
            
            (1,251,628
            )
            
            (477,981
            )
            
            (45,329
            )
            
            (1,774,938
            )Other
                income/(expense)
            
            
            266,625
            
            
            26,787
            
            
            (226
            )
            
            293,186Earnings
                before tax
            
            
            5,496,573
            
            
            784,066
            
            
            (39,150
            )
            
            6,241,489Income
                tax
            
            
            (423,284
            )
            
            (42,754
            )
            
            -
            
            
            (466,038
            )Net
                income
            
            $
            5,073,289
            
            $
            741,311
            
            $
            (39,150
            )
            $
            5,775,451





**17.
      EARNINGS PER SHARE**





Components
      of basic and diluted earnings per share were as follows:





**12 months ended**
              **December 31, 2007**
            
            **12 months ended**
              **December 31, 2006**Net
                Income (A)
            
            $
            7,707,370
            
            $
            5,073,289Constructive
                Preferred Dividends (B)
            
            
            -
            
            
            6,418,864Income
                Available to Common Stockholders (C)
            
            $
            7,707,370
            
            $
            (1,345,575
            )Basic
                Weighted Average Shares Outstanding (D)
            
            
            17,165,894
            
            
            14,693,186Dilutive
                Shares:-Addition
                to Common Stock from conversion of Preferred Stock A
            
            
            114,630
            
            
            --Addition
                to Common Stock from conversion of Preferred Stock B
            
            
            4,139,001
            
            
            1,005,817-Addition
                to Common Stock from Exercise of Warrants
            
            
            597,571
            
            
            -Diluted
                Weighted Average Shares Outstanding: (E)
            
            
            22,017,096
            
            
            15,669,003Earnings
                Per Share-Basic
                (C)/(D)
            
            $
            0.45
            
            $
            (0.09
            )-Diluted
                (C)/(E)
            
            $
            0.35
            
            $
            (0.09
            )Weighted
                Average Shares Outstanding-Basic
            
            
            17,165,894
            
            
            14,693,186-Diluted
            
            
            22,017,096
            
            
            15,699,003**Supplemental
                Data:**Proforma
                Earnings Per Shares in the Absence of Constructive Preferred
                Dividend-
                Basic [(B) + (C)] / (D)
            
            $
            0.45
            
            $
            0.35-
                Diluted [(B) + (C)] / (E)
            
            $
            0.35
            
            $
            0.32Weighted
                Average Shares Outstanding-Basic
            
            
            17,165,894
            
            
            14,693,186-Diluted
            
            
            22,017,096
            
            
            15,699,003


F-28


**18.
      INVESTORS RELATIONS STOCK COMPENSATION EXPENSE**





For
      the
      year ended December 31, 2006, the Company recorded $92,468 of stock compensation
      expense for 100,000 stock options granted to the Company’s investor relations
      firm, CCG Elite in 2006. The entire stock option compensation expense was
      recorded under other expense in the Company’s statements of income.





The
      range
      of the exercise prices of the stock options granted are shown in the following
      table: -





**Price
                Range**
            
            Number of Shares$0
                - $9.99
            
            100,000
                shares$10.00
                - $19.99
            
            0
                shares$20.00
                - $29.99
            
            0
                shares





No
      tax
      benefit has yet to be accrued or realized. In 2007, the Company operated as
      an
      income tax-free entity in the PRC, and the Company has yet to repatriate its
      earnings, accordingly it has not recognized any deferred tax assets or liability
      in regards to benefits derived from the issuance of stock options.





The
      Company used the Black-Scholes model to value the options granted. The following
      shows the weighted average fair value of the grants and the assumptions that
      were employed in the model: -





Weighted-average
                fair value of grants:
            
            $
            0.92Risk-free
                interest rate:
            
            
            4.176
            %Expected
                volatility:
            
            
            40.00
            %Expected
                life in months:
            
            
            48
                months





**19.
      SUBSEQUENT EVENT**





The
      Company entered into a registration rights agreement related to a private
      placement financing transaction with accredited investors on September 13,
      2007.
      Pursuant to the agreement, the Company would be subject to liquidated damages
      if
      the registration statement was not (1) filed within 45 days of the execution,
      and (2) if the registration statement had not been declared effective within
      150
      days of filing the registration statement. The Company has not met the
      aforementioned requirements under the registration rights agreement, and
      currently believes that it would be liable to pay $462,912 in liquidated damages
      to the investors in 2008.


F-29